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The Brevity Book on 
ECONOMICS 



EDITORIAL BOARD 

Charles Manfred Thompson, Chairman, 

Professor of Economics, University of Illinois. 

Edward Bruce Moon, 

Director of Merchants' Service Bureau, 
Orange Judd Publications. 

Charles F. Abbott, 

Director of Sales, The Celluloid Company, 
New York. 

John B. Swinney, 

Organization Director, Retail Research Asso- 
ciation, New York. 

Harry A. Wheeler, 

Vice-President, The Union Trust Co., 
Chicago; Former President, The United 
States Chamber of Commerce. 



The Brevity Book on 

E CONOM I C S 

By 

HARRISON McJOHNSTON 

Author of the Modern Business Text 
on Business Correspondence, Alexander 
Hamilton Institute. 



BREVITY PUBLISHERS 

Plymouth Building 

CHICAGO 

1919 



^«)l 






PREFACE 

This .book is a simplified statement of the 
essential principles of Economics as accepted by 
representative economists. Its aim is to give the 
reader, in return for a minimum amount of his 
time and effort, a good working knowledge of 
this underlying science of business. 

Harrison Mcjohnston 
Chicago, Illinois, 
July 1,' 1919 



otr -b idib 



Copyrighted, 1919, by 

Harrison McJohnston 

All rights reserved 



A53G854 



CONTENTS 

CHAPTER PAGE 

I The Aims of Economics 1 

II Price and Price Changes 6 

III Domestic and Foreign Trade 19 

IV Domestic and Foreign Exchange 29 

V The Production of Wealth 53 

VI The Consumption of Wealth 53 

VII The Distribution of Wealth 61 

VIII Special Problems of Economics 69 

Appendix — Classified References 77 

Index 85 



The Brevity Book on 
ECONO M I C S 

CHAPTER I 

The Aims of Economics 

(Economics is a scientific study of man's efforts in sat- 
isfying his wants for material things and services. It is 
an underlying science of business. The entire business 
world is the laboratory of the economist. 

The economist is mainly interested in promoting the 
material well-being of society as a whole. He aims to 
help improve the general standard of living and to pro- 
% mote better distribution of wealth and income. His task 
jj is to study scientifically all the essential factors involved 
J in the promotion of national and world prosperity. To 
him, prosperity means an abundance of economic goods 
for distribution and abundant opportunity for all to pos- 
sess and enjoy the good things of life. 

Very few economists oppose the individual's right to 
possess private property ; but they all challenge abuses of 
this fundamental institution, wherein public welfare is 
sacrificed to the gain of individuals. Because business 
activities are now so thoroughly cooperative, society must 
have public rights — designed to make individual rights 
more valuable and more equitable. Public ownership of 
highways, tof waterways, of schools, and of similar 
"public utilities" which can clearly render better service 
when owned by all the people, is now generally advocated. 
But all the costs should be considered before making ex- 
tensions of public ownership. Government ownership and 
regulation are treated in Chapter IH with the question of 
monopoly. 

Economists commonly emphasize the advantages of free 
and open competition as a fundamental incentive to econ- 

Page one 



2 BREVITY BOOK ON ECONOMICS 

omic progress — when competitive trade is conducted fair- 
ly and within the bounds of good public policy. Brisk 
trade is considered to be a chief source of general pros- 
perity, and intelligent regulation of trade is generally be- 
lieved to be necessary. The extent of state "interfer- 
ence" in the policies and methods of business has always 
been a bone of contention among the economists of vari- 
ous schools. 

Historically, economists are divided into several schools. 
Prior to the time of Adam Smith — whose "Wealth of Na- 
tions," 1776, ushered in the Classical School — the Mercantil- 
ists, mainly in England, and the French Physiocrats were 
the cjbief schools of economic thought. 

The Mercantilists held that national prosperity depended 
mainly upon accumulating a large stock of gold and sil- 
ver. They therefore advocated strict state regulation of 
industry and commerce, designed primarily to increase 
exports and to decrease imports of merchandise, and thus 
to help increase imports of gold and silver. The Physio- 
crats were inclined to look upon agriculture alone as 
truly productive, excluding the work of merchants, trad- 
ers, professional men, and the like; while the Classical 
School taught that manufacturing and trade, as well as 
agriculture, were productive. 

The leading economists of the Classical School were 
Adam Smith, Thomas Robert Malthus, David Ricardo, 
and John Stuart Mill. They lived in the last half of the 
eighteenth century and the first half of the nineteenth. 

Adam Smith is often called "the father of political econ- 
omy." There is no distinction between "economics" and 
"political economy"; the latter being the name given to 
this science by the early economists. "Economics" comes 
from a Greek word which means household economy. 
"Political" was added in order to distinguish household 
from state economy. 

The economists of the Classical School emphasized in 
particular the so-called laissez-faire (let-things-alone) 



THE AIMS OF ECONOMICS 3 

principle, believing in freedom of business enterprise, and 
particularly in freedom of the individual from the dicta- 
tion of the state. They therefore advocated free trade — 
a movement which became so strong that England about 
the middle of the nineteenth century adopted her free- 
trade policy. This was a decided change from the at- 
titude of the mercantilists who gave individual enter- 
prise very little freedom from state supervision. The 
Classical School believed that "intelligent self-interest," 
operating under conditions of free, fair, and open com- 
petition, would most effectively foster aggressive produc- 
tion and equitable distribution of wealth. 

Modern economists have reacted against the Classical 
School's extreme opposition to governmental "interfer- 
ence." The trend of economic thought, for at least 
thirty or forty years, has been toward greater state 
regulation of production and trade. Except for 
this one important point, however, most of the thought 
of the classical economists remains in modern economics ; 
and a very large part of modern economic thought may 
be traced to the classical economists. Adam Smith, for 
example, pointed out clearly the productive advantages of 
specialization, or division of labor, which is the most 
marked and fundamental characteristic of modern large- 
scale production. 

Later schools of economic thought, however, have 
modified somewhat and have greatly supplemented the 
thought of the classical economists. The Historical 
School, arising in Germany about the middle of the 
nineteenth century, reacted against the abstract methods 
of the Classical School, claiming that economic inquiry 
should be concerned mainly with historical facts. The 
Austrian School, sometimes called the Psychological 
School, has made an intensive analysis of human wants. 
This school developed the principles of "marginal utility" 
explained in the first part of the next chapter. 

Because of their outlook into the future, some econ- 



4 BREVITY BOOK ON ECONOMICS 

omists have been called optimists and others pessimists. 
The "optimistic school" is essentially a reaction against 
pessimistic forecasts, of which the views of Malthus are 
representative. In his "Theory of Population," 1798, 
Malthus maintained that population tends to increase 
faster than the food supply; and the generally bad living 
conditions of common labor in England in the middle of 
the nineteenth century seemed to verify the Malthusian 
doctrine. Since then, however, the standard of living 
of the laboring classes has undoubtedly improved, with a 
marked decrease in the relative number of the very poor 
in nearly all countries. Never more than today have we 
been so much interested in bettering the living conditions 
of the poorer classes. 

Economics has never been a "closet philosophy." Econ- 
omists have always been interested in practical affairs. 
Adam Smith was keenly interested in the business men 
of his own town in Scotland. David Ricardo had made 
a fortune in business before he was forty years of age. 
But nearly all economists, until recently, confined them- 
selves mainly to public problems. Today, however, they 
are becoming more and more interested in current busi- 
ness problems, such as the major problems of organiza- 
tion, finance, marketing, and accounting. 

Although economists now, more than ever, try to help 
solve the practical problems of individual business con- 
cerns, the broader problems that affect all business are 
still the primary problems of economics — to make plain, 
for instance, the true relation of capital to labor, and the 
relation of capital and labor to the welfare of the gen- 
eral public. 

The number of business and professional men who 
now recognize the practical value of this science is in- 
creasing rapidly. Leading business men now more than 
ever see the importance of a scientific study of business 
in general, apart from consideration solely of the wel- 
fare of a single business enterprise. They recognize the 



THE AIMS OF ECONOMICS 5 

increasing interdependence of all commerce and industry, 
and of the several classes in society. 

The study of modern economics helps the individual 
business man in many ways. It aids him in exercising 
independent judgment of the best means and methods of 
solving many current business problems — problems of 
money, credit, and banking, of domestic and foreign trade 
and the tariff, of government ownership and regulation 
of industry and commerce, of transportation, of business 
and public finance, of social reforms; in short, all the 
major problems of the business world. Perhaps the busi- 
ness man's most important direct use of a thorough knowl- 
edge of economic laws and principles, however, is in help- 
ing him to forecast fundamental changes in business con- 
ditions. 

Almost all these changes in business conditions have 
something to do with prices and markets. Everywhere 
and at all times we are face to face with alterations in 
relative values, revealed in changing prices. Modern 
economists therefore occupy themselves largely with a 
study of the fundamental causes and effects of changes 
in prices. 



CHAPTER II 

Price and Price Changes 

Price is value expressed in money. The value of a 
commodity or service, \s expressed by its price, arises 
from its utility and scarcity. Utility, in Economics, means 
power to satisfy want. Economic scarcity exists when 
the amount of any commodity or service is less than suffi- 
cient to satisfy all want for it. Air and water, for ex- 
ample, are seldom scarce commodities. At certain times 
and places, and in some forms, air and water are, of 
course, economically scarce. But, as a whole, they are 
"free goods." They are indispensable, but they do not 
have exchange value; they do not have a price. Both 
utility and scarcity are requirements in all commodities 
that are bought and sold. 

The satisfaction of human wants is the ultimate aim 
of economic activities ; and the possible development of 
the number and variety of human wants seems to be al- 
most without limitation. But any single want is capable 
of being completely satisfied. 

If a person is hungry and, for example, has a few 
apples, all about alike, the first apple he eats will yield 
him greater utility or want-satisfying power than the 
second apple he eats; the second will yield greater util- 
ity than the third; and so on until his want is completely 
satisfied. This is the principle of diminishing utility: 
each successive unit of any commodity, as consumed, 
yields less and less utility in satisfying a single zvant. 

If a person has, say, three apples, and the satisfaction 
of his own immediate hunger alone is considered, it is 
obvious that any one of his three apples will be worth 
no more to him than the third apple to be eaten. Its value 
measures the value of each of the other two; for if he 
should sell or give away or lose one of his three apples, 
it would be the amount of satisfaction he would get from 



PRICE AND PRICE CHANGES 7 

eating the third apple that he would lose. Thus the value 
of the last unit consumed in a stock of goods measures 
the value of each of the other units. This last unit to 
be consumed — the "least important" unit — is called the final 
or marginal unit of supply; and the fact that the value of 
the final unit to be consumed measures the value of the 
other units, is called the principle of final or marginal 
utility. 

These principles of diminishing and final utility help 
somewhat in explaining the law of supply and demand. 
The greater the stock of any commodity, relative to the 
amount wanted or demanded, the less the value of the 
final unit of that commodity to be consumed, according to 
the principle of diminishing utility; and the value of this 
final or marginal unit measures the value of each of the 
other units, according to the principle of final or marginal 
utility. Therefore, the value of any unit in the total stock 
of any commodity, such as wheat or corn or cotton, tends 
to go down when the stock increases relative to the amount 
wanted, and up when the stock decreases. If the amount 
wanted increases or decreases relative to the stock, the 
effect upon the price is the same as an opposite change in 
stock relative to want. 

These tendencies imply freedom of choice and freedom 
of competition. Entirely free and open competition im- 
plies that all bids and offers are known to all buyers and 
sellers, also that each buyer is competing with all other 
buyers and that each seller is competing with all other 
sellers. This condition of entirely free and open competi- 
tion seldom exists, but it is a helpful supposition in the 
study of market price. 

The market for any commodity may be technically 
defined as the area in which one price prevails for that 
commodity; or it may be defined as the area wherein the 
main factors which determine this one price, operate. 
Under free competition, a market price is the prevailing 



8 BREVITY BOOK ON ECONOMICS 

or generally current price which results from the bids and 
offers of competing buyers and sellers. 

All buyers who are willing to buy at the market price, 
but would not buy if the price were any higher, are known 
as the marginal buyers. All sellers who would not sell 
if the market price were any lower, are known as the 
marginal sellers. All other sellers, who would be willing 
to sell if the price were lower, gain what is sometimes 
called seller^s or producer's surplus when they sell at the 
market price; and all other buyers, who would buy even 
if the price were higher, gain buyer's or consumer s sur- 
plus when they buy at the market price. 

Buyers will not knowingly pay more than the market 
price, nor will sellers knowingly sell for less than the mar- 
ket price. Yet, rather than fail to buy all they want of 
a commodity or service, many buyers would be willing 
to pay more than the current market price ; and many 
sellers, rather than fail to sell all they want to sell, would 
be willing to sell for less than the current market price. 
Therefore, if demand at the market price falls off for 
any reason, some sellers will lower their price in order to 
get ahead of other sellers; and if supply at the market 
price falls off for any reason, some buyers will raise their 
bids in order to get ahead of other buyers or to tempt 
more sellers into the market. Thus relative changes in 
supply and demand at the current market price are re- 
flected by changes in the bids and offers of buyers and 
sellers. These bids and offers cause the market price both 
to be what it is at any one time and to change from time 
to time. 

It is necessary to remember that supply and demand are 
different at different prices. The amount of any com- 
modity or service offered at the current market price is 
called the effective supply; the amount demanded at that 
price is the effective demand. The amount that would 
be offered or demanded at any other than the market 
price is known as potential supply or demand. 



PRICE AND PRICE CHANGES 9 

The movement of the market price for any commodity, 
under freely competitive conditions, is toward the point 
which equals the cost of production to marginal producers 
— those whose costs of production are highest. If the 
price falls below this point, the marginal producers will 
suspend production, and will probably transfer their at- 
tention to the production of some other commodity the 
market price of which will be more likely to yield them 
a satisfactory profit, A new set of marginal producers 
will then be in the market. But if the market price 
yields the marginal producer a relatively wide margin 
of profit, additional producers are attracted into the in- 
dustry. They increase the supply — and the market price 
tends to fall. This tendency of the market price, in a 
competitive industry, to travel toward and to remain at 
the point which equals the cost of production of marginal 
producers — plus the least acceptable profit to them — is 
the lazv of normal competitive price. Fixing prices for 
the service of public utilities— railroad rates, for example 
— upon the basis of cost plus a reasonable profit, is recogni- 
tion of the law of normal competitive price. 

While the market price tends to be established by the 
bids and the offers of marginal producers and sellers, and 
tends to move toward the normal competitive price, as 
explained above, lack of complete information on the 
part of both buyers and sellers, and lack of free com- 
petition among buyers and among sellers, particularly 
among sellers, cause the market price of many commodi- 
ties to vary from the normal competitive price. 

Monopoly, representing various kinds and degrees of 
unified control of supply — or of demand in exceptional 
cases — affects in some degree the market price of many 
commodities. Economic monopoly exists when this uni- 
fied control is sufficient to enable the monopolist, usually 
by manipulating supply, to cause the market price to be 
above or below the normal competitive level. 

Monopoly, however, may or may not result in a high 



10 BREVITY BOOK ON ECONOMICS 

price; that is to say, in a price higher than the normal 
competitive price. Unified control of supply, as in the 
case of city electric light and power service, may result 
in savings which permit even a lower price than would be 
the case were two or more companies competing for trade. 
In many other industries one large monopolistic company 
may enjoy many economies which enable it to make a 
lower price than could be made when several smaller com- 
peting companies are operating; and this lower price may 
yield the company its greatest possible net profit. This 
result, however, would depend upon the relative cost per 
unit of product when diflFerent quantities are produced, 
and the extent to which low prices would bring greater 
demand. 

Virtually every producer faces conditions of either de- 
creasing, or increasing, or constant cost ; meaning that the 
cost per unit of product either decreases, increases, or 
remains constant with increases in the quantity produced 
in any one period of time. The monopolist tries to dis- 
cover the price which will yield him the greatest net profit. 
He wants to know how various prices will affect demand, 
and how various quantities produced in any period of time 
will affect the cost per unit of product Is demand elastic 
or inelastic f If inelastic — if demand would not differ 
very much at different prices, as in the case of table salt 
— he would probably fix a relatively high price. If elastic, 
as in the case of nearly all commodities, the monopolist 
would want to fix his price at the point where the num- 
ber of units demanded at that price, multiplied by the net 
profit per unit, would yield him the best total. Thus the 
"best" monopoly price would be fixed with a view toward 
anticipating its effect upon all the factors which would 
cause present and future changes in the cost per unit 
of product and in the character and quantity of demand, 
including the effect upon potential competition. These 
factors are innumerable. Many of them cannot be an- 
ticipated. Usually the monopolist's method of fixing his 



PRICE AND PRICE CHANGES 11 

most profitable price is experimental. Other aspects of 
monopoly are treated in the next chapter. 

In competitive as well as in monopolistic industries, the 
problem of producing the most profitable quantity is often 
difficult, especially so when production within the indus- 
try as a whole tends to vary a great deal from season to 
season, and when demand, at any particular price, is some- 
what uncertain. The risk of over-production and there- 
fore of loss from a fall in the market price, causes pro- 
ducers in many competitive industries to be careful in 
their forecasts of the total demand for and supply of 
their products. Speculation, explained later on, and other 
indications of future demand relative to supply are of 
extreme importance to producers in competitive industries. 

Even though many conditions prevent competition from 
being entirely free and open, changes in the ratio of 
supply and demand are either a primary cause or a 
primary result of changes in prices. The essential condi- 
tion of any change in price is a change in the ratio of 
supply and demand. 

Prices are relative to one another, and the price of one 
commodity is "sympathetically" related to the prices of 
other commodities. A change in the price of cotton aflfects 
the price of wool ; and a change in the price of wool 
affects the price of cotton. In all cases wherein one com- 
modity may be, to some extent, substituted for another, 
an increase or a decrease in the stock of one tends to 
affect the price of the other the same as an increase or 
a decrease in the stock of the other — in so far as the two 
commodities are satisfactory substitutes one for the other. 
There is also a connection between the prices of comple- 
mentary goods such as lumber and paint; or of "goods- 
in-series," such as iron ore and steel and the many prod- 
ucts made of steel. An increased demand for lumber 
sooner or later increases the demand for paint; while an 
increased demand for, say, steel ships increases the de- 
mand for steel which increases the demand for iron ore — 
tending to cause the prices of all three to increase. 



12 BREVITY BOOK ON ECONOMICS 

As yet, however, economists have not studied intensively 
the various kinds and degrees of "sympathy" between 
goods of various classes and their respective prices. Only 
general relationships have been observed. But economists 
have given a great deal of attention to the causes of 
changes in the general level of prices. We know that the 
prices of almost all commodities have sometimes risen and 
fallen together. Index numbers are used to indicate these 
changes in the general price level. The average price of a 
large number of basic commodities during some past 
period, usually some decade, such as 1880 to 1890, is 
chosen as a standard price level and is represented by 100. 
The ratio that the current price level — or the price level 
for any other time or period — bears to the standard price 
level, is expressed by a number v/hich bears the same ratio 
to 100. If the current price level, for instance, is twice 
as high as the standard, it would be indicated by 200, 
which would be the so-called index number of the cur- 
rent price level. 

Why do all prices in general tend to rise or fall to- 
gether over long periods of time? Does the law of supply 
and demand, as it affects the prices of all commodities, ex- 
plain this satisfactorily, or does the dollar itself change 
in value? 

It is commonly believed that the purchasing power of 
a dollar bears a definite relation to the quantity of gold 
in the country, because a dollar represents a fixed amount 
of gold and because gold is the basis of our active supply 
of money and credit. It is believed that the value of 
a dollar tends to vary with changes in the amount of 
money-and-credit in circulation. Obviously it would take 
a greater amount of money-and-credit to put through the 
same amount of purchases at higher prices — unless the 
money-and-credit were to circulate faster during the 
period of time involved ; for an increase in the 
rapidity of circulation of money-and-credit operates 
the same as an increase in the amount of them in cir- 



PRICE AND PRICE CHANGES 13 

culation. It is not necessarily true, however, that the 
greater the available supply of money-and-credit, the less 
will be the value of the dollar. But the available supply 
of money-and-credit and its rapidity of circulation seem 
to have considerable influence upon the rise and fall of 
prices in general— through the effect upon the demand for 
and the supply of commodities and services of all kinds. 

The ease with which business men can make loans, or 
otherwise find capital for expansion, affects the general 
demand for goods of almost all kinds. For example, the 
pronounced rise in prices during the war was caused pri- 
marily by the increased demand for many kinds of goods 
required for conducting the war. Circulating credit was 
greatly expanded to enable contractors to buy materials 
and labor to take care of war orders. These contractors, 
partly as a result of their "cost-plus" contracts, were able 
to bid up prices of many materials and of many kinds of 
labor. All other industries were forced to bid against 
them — and this was the primary cause of the general rise 
of prices. Our increased gold supply permitted a great 
increase in bank credit available for business uses, making 
it easier for buyers to secure working capital— and to bid 
up prices on the supplies of materials and labor which 
were so urgently needed. Increased demand for labor, 
caused in part by a decreased supply of labor on account 
of enlistment, forced up the price of labor in nearly all 
industries, and gave labor more money for the purchase 
of merchandise at higher prices. 

It seems to be true, however, that generally rising 
prices over relatively long periods of time, such as the 
steadily rising prices from 1896 to 1914, were caused 
mainly by our increasing production of gold and by im- 
provement in our use of gold as the basis of our supply 
of money-and-credit in circulation. 

It is commonly believed that the present increase in the 
amount of bank credit available for use is largely per- 
manent. Consequently, it seems reasonable to expect the 



14 BREVITY BOOK ON ECONOMICS 

increase in the general price level to be permanent— -in so 
far as the amount of money and of credit instruments in 
circulation shall remain proportionately the same as it is 
today. But, as explained later on in Chapter IV, prices 
in various countries tend to seek the same level. It is a 
world rather than a national question. Even after consid- 
erable deflation of credit in many European countries, 
there will doubtless remain there a permanent increase in 
bank credit. Most economists feel, therefore, that we maj 
expect a permanent increase in the general price level as 
compared with the level of prices in 1914. Just how mucli 
prices in general will eventually fall from their high level 
and just when the general price level will begin to fall, 
seem to be impossible to predict. Many special students of 
the subject feel that prices will settle at somewhere near 
the 1916 level. 

The idea that the general level of prices is regulated 
by the amount of money-and-credit in circulation, is 
known as the quantity theory of prices. It is further 
discussed in Chapter IV. 

But whether a rise or a fall in the general price level 
be caused mainly by more or less interdependent change-- 
in the demand for, relative to the supply of, many com- 
modities, or mainly by changes in the supply of, relative 
to the demand for, money-and-credit — or by both, as seems 
to be the case — it is quite clear that generally falling prices 
discourage production and trade while they are falling, 
and that generally rising prices encourage production and 
trade while they are rising. Manufacturers naturally hesi- 
tate to produce many commodities, based upon curre- 
expenses of production, when they face the prospect of 
selling these commodities later on for less than the cur- 
rent market prices ; and of course merchants hesitate to 
buy many commodities the retail prices of which may fall 
before they sell them. Nearly all consumers are disin- 
clined to buy freely when prices are falling. Thus fall- 



PRICE AND PRICE CHANGES 15 

ing prices tend t© cause "hard times," or a decrease in 
the volume of trade, involving a decrease in production. 
Rising prices have an opposite effect They tend to en- 
courage production and trade. Yet a rising price level 
is a disadvantage to creditors who get back in purchasing 
power less than they lend by as much as the value of a 
dollar falls between the time they lend and the time their 
loan comes due. But when prices are falling, debtors 
suffer, for they must pay back more, in purchasing power, 
than they borrowed. This result of changes in the pur- 
chasing power of the dollar is known as the problem of i 
the changing "standard of deferred payments." It em-/ 
phasizes the desirability of having a dollar of more stable 
value. Some of the proposals for accomplishing this are 
stated a little later on. 

Although rising prices stimulate business, prices in gen- 
eral cannot continue to rise indefinitely. When they stop 
rising and begin to come down, business depression fol- 
lows ; and the depression tends to be severe in proportion 
to the rapidity of the fall ia prices — and the lack of pre- 
paration for it on the part of business men. 

Crises or panics are relatively sudden business depres- 
sions of varying breadth and depth, which have occurred 
at intervals of about ten to twenty years. They are 
marked by an abrupt decline of prices. The true causes 
of crises are not as yet fully understood. Excessive optim- 
ism during a period of rising prices — with feverish promo- 
tion of industrj'^ and trade, involving reckless investments 
and the placing of too much capital into enterprises from 
which returns would come only in the remote future — is 
probably the main cause of crises. It is excessive eager- 
ness to take advantage of new opportunities or of steadily 
rising prices — while they are rising. Then, remembering 
past experiences, an intuitive feeling that prices cannot 
indefinitely continue to rise, gains strength as prices mount 
higher — up to the breaking point, precipitated perhaps by 
the failure of some big business concern, which is quickly 



16 BREVITY BOOK ON ECONOMICS 

followed by a general attempt to avoid the inevitable 
losses of a sudden decline in prices. 

Thus, although something may be said in favor of a 
steadily rising price level as a stimulant to business de- 
velopment, the ultimate consequences seem to be undesir- 
able. Whether so to control the supply of money-and- 
credit, if possible, as to prevent both a general rise and a 
general decline in prices, is an open question. Some feel 
that the purchasing power of a dollar and of all mone- 
tary units used in other countries, could be and ought 
to be fixed once for all time and rigidly maintained. Many 
ingenious methods of thus stabilizing the value of the 
monetary unit have been proposed. Some suggest alter- 
ing from time to time the amount of gold represented by 
one dollar. Others advocate government control of the 
production of gold. A few suggest doing away with gold 
as the basis of the value of all monetary units and sub- 
stituting some abstract unit with its value or purchasing 
power carefully controlled by an international tribunal 
authorized to regulate its supply according to changing 
volumes of trade. 

Better understanding of the true cause or causes of 
generally rising and falling prices will undoubtedly help 
in finding the best means of avoiding relatively wide and 
sudden changes in the general level of prices. It is hoped 
that the use of federal reserve notes and control of re- 
discount rates by the Federal Reserve Board, explained 
later in Chapter IV, will help control fluctuations of the 
general price level. 

While business as a whole is affected by generally rising 
and falling prices as explained on preceding pages, busi- 
ness men are more directly interested in the current 
fluctuations of the prices of individual commodities as 
these prices are influenced by impending changes of the 
supply of and demand for them. Forecasting price changes 
of individual commodities is today a highly specialized art, 
especially with speculators on the stock and produce ex- 



PRICE AND PRICE CHANGES 17 

changes. These speculators may or may not render eco- 
nomic service, depending largely upon the accuracy of 
their judgment concerning future changes of supply and 
demand, also upon their integrity in keeping free from 
manipulation of prices by means of purchases or sales 
engineered solely in an attempt to change market prices 
irrespective of the actual prospective changes of supply 
and of demand as controlled by producers and by ultimate 
consumers. Honest and intelligent speculation, however, 
is beneficial. It tends to prevent wide and abrupt fluctua- 
tions of prices and permits manufacturers to purchase raw 
materials for future delivery with less risk of loss from a 
sudden fall in prices ; and it tends to result in a more 
accurate adjustment of the market price to the actual con- 
ditions and the prospective conditions of supply and de- 
mand. In the case of some products, a larger future de- 
mand relative to supply, anticipated by speculators and 
made known through their willingness to pay a higher 
price for future delivery, tends to cause producers to ex- 
pand production ; while a smaller future demand relative 
to supply anticipated by speculators, tends both to dis- 
courage production and to encourage consumption. 

Perhaps the greatest benefits of speculation come from 
its effect upon consumption. A small future supply of 
any commodity — wheat, for instance — anticipated by spec- 
ulators who are therefore willing to pay a higher price 
for wheat, tends to cause present consumption of wheat 
to be lessened and thus conserves more of the supply for 
future use. 

Speculation combined with our storage facilities, such 
as cold storage of eggs and grain elevators, permits more 
even consumption throughout the year, causing the re- 
spective prices of many commodities to be more nearly 
the same at different times. We pay more than we would 
otherwise pay for eggs, as an example, in the spring and 
summer, but less than we would otherwise have to pay 
for eggs in the winter. 



18 BREVITY BOOK ON ECONOMICS 

Speculators are professional risk takers, freeing many 
other business men from much of the risk they would 
otherwise be compelled to carry. But professional specu- 
lation is limited to commodities the separate units of 
which are uniform in character and value, such as bushels 
of wheat or bales of cotton, or stocks and bonds ; also 
to commodities produced in relatively large quantities. 
The stock and produce exchanges, where these commodi- 
ties are bought and sold in large quantities, are the best 
examples of competitive markets — wherein all bids and 
offers may be instantly known to many traders, permitting 
frequent and fine adjustments to continuous changes in 
the ratio of supply and demand. 

Arbitraging is another specialty. It is the business of 
almost simultaneously buying something in one market 
where the price is relatively low, and selling it in another 
market where the price is higher. Arbitrageurs operate 
mainly in the purchase and sale of foreign exchange, 
tending to cause the price of foreign exchange to be more 
nearly the same at any one time in different markets. 

Such are the more fundamental causes and effects of 
price changes. All revert directly or indirectly back to 
the fundamental law of supply and demand — which op- 
erates to bring about the necessary adjustments of produc- 
tion on one hand and of consumption on the other. 



CHAFTElt III 

Domestic and Foreign Trade 

Four different appraisals of value are made in each pur- 
chase and sale. B contemplates the purchase of a watch 
from A for five dollars. B estimates both the relative 
value of five dollars and of the watch. A does the same. 
If B estimates greater utility to him from possessing the 
watch than from retaining possession of his five dollars, 
and if A estimates greater utility to him in possessing 
the five dollars, the transaction will be made. Both B 
and A will gain utility. 

Thus trade results from the difference in the value of 
commodities as appraised by different individuals or by 
different groups of individuals. This difference in the 
appraised value of commodities and services arises from 
differences in their cost of production as between buyers 
and sellers and from differences in ability to find and de- 
velop utility, or want-satisfying power, in them. 

Trade is man's method of co-operation in gaining the 
greatest total of wealth at the least cost. It permits in- 
creased specialization and division of labor; divisions 
among countries and sections of countries as well as 
among the workers in industrial plants. Trade is usually 
classified on the basis of the area covered by the trans- 
fer, into local, domestic or national, and foreign or inter- 
national. 

The domestic trade of nearly all countries is much 
greater in volume than their trade with other nations. 
The foreign trade of the United States, for instance, is 
roughly estimated at 8 per cent to 12 per cent of the total 
trade. National prosperity, therefore, wherein employ- 
ment at fair wages is plentiful, depends greatly upon the 
volume of domestic trade, involving, as it does, a com- 
mensurate volume of production. But the relative im- 
portance of foreign and domestic trade, as factors in 



20 BREVITY BOOK ON ECONOMICS 

pramoting prosperity, varies a great deal under different 
conditions, as explained later ©n. 

That "competition is the life of trade" is quite gener- 
ly believed to be the case. Legal regulation of trade 
in this country, has been designed primarily to prevent 
practices in restraint of competition — to keep industries 
open to potential competition. The chief aim of the Sher- 
man Anti-Trust Law (1890) and of the Clayton Act 
(1914) is to keep competition free and open and fair. The 
Sherman Law strikes at combinations in restraint of in- 
terstate commerce ; while the Clayton Act is directed large- 
ly toward the prohibition of trade practices which are 
regarded as "unfair" competition, and it created the Fed- 
eral Trade Commission as an agency for accomplishing 
this purpose. One of the specific aims of the Clayton Act, 
for example, is to do away with interlocking directorates : 
to prohibit a capitalist from being a director in two or 
more large companies, wherein he would have the op- 
portunity to cause one company to favor, unfairly, an- 
other company. 

Recently, certain kinds of associations and agreements 
among competitors, although some of them seem to be 
contrary to interpretations of the Sherman Act, are be- 
ginning to be looked upon with favor. Many associations 
designed to foster cooperative efforts in meeting competi- 
tion now exist. Cooperative advertising is conspicuous, 
wherein the companies of one industry combine in cam- 
paigns of publicity for helping along the sales of the 
products of the industry as a whole; and several associa- 
tions encourage the use of uniformly accurate cost ac- 
counting methods among competing companies in their 
respective industries — to prevent loss from estimates that 
are wrongly figured. The willingness of competitors with- 
in a single industry to share with each other their knowl- 
edge of improved methods is characteristic of an increas- 
ing number of business concerns; because many leading 
business men feel that improvement in their industry as 



DOMESTIC AND FOREIGN TRADE 21 

a whole will make business better for their individual 
companies. Many of these cooperative efforts among com- 
petitors in many industries are designed solely to give 
better service at lower cost to consumers — with increased 
profits to producers. Such cooperation within single indus- 
tries tends both to place competition within the industry 
upon a more solid basis of service to customers and to 
intensify the competition between competing industries — 
as in the case of the brick industry versus the lumber or 
the cement industry. Modification of the interpretations 
of our anti-trust laws to permit certain kinds of coopera- 
tion among competitors is an important current problem. 
Its solution requires a true conception of monopoly as 
related to prices and to government ownership and govern- 
ment regulation. 

As suggestion in Chapter II, monopolistic power checks 
the operation of the competive law of prices in the case 
of many commodities and services. But it is often diffi- 
cult to determine the extent of monopolistic control of 
price in any industry. The size of a business concern is 
not, in itself, evidence of monopoly, although many con- 
cerns have grown large by grace of monopolistic control 
of prices. But when two or more big concerns freely 
compete, bigness may be very desirable. Large develop- 
ment of a business often, if not usually, indicates excep- 
tional ability in rendering adequate service at a low price. 
However, when one concern grows to be much larger 
than any of its competitors, it tends to develop monopo- 
listic control of supply. 

Regardless of size, it seems to be good public policy 
to guard against arbitrary private control of prices, espe- 
cially when the welfare of large numbers of people de- 
pends upon a relatively low price. And public welfare 
is also advanced when cost-reducing cooperation is per- 
mitted to all competitors alike. 

Some industries ought to be monopolies if they can 
thereby reduce the cost of production and put themselves 



22 BREVITY BOOK ON ECONOMICS 

into position to render better service at a lower price. 
Street railways, electric light companies, and many other 
public utilities, in their respective localities, serve best as 
monopolies. They are sometimes called natural or ex- 
pedient monopolies — industries wherein competition in- 
creases the cost of service to consumers or wherein it 
may become self-destructive to the industry, as was the 
case in the railway rate wars in times past. Public regu- 
lation of rates in such cases has proved a good thing for 
all concerned. 

Public control in general is applied to prices, to com- 
petitive methods, to the employment of labor, and some- 
times to the quality of service rendered. Price control 
in the form of rate making and control of competitive 
methods is commonly exercised. Labor legislation is rap- 
idly growing. Quality of service, however, is seldom 
regulated; but its importance is beginning to be recog- 
nized. The general tendency is toward increasing public 
control. This seems advisable in proportion to the poten- 
tial ability and especially in proportion to the observed in- 
clination of an industry, large or small, to take advantage 
of monopolistic power to earn more than a "fair return" 
on investment. A fair return is generally construed to be 
the normal profit that is earned by similar kinds of busi- 
ness which operate under competitive conditions. In the 
case of many public utilities, the tendency of courts and 
commissions is to fix a price which yields the "normal" 
profits on the actual investment of capital ; and this profit 
is fixed close to the average return on invested capital 
as revealed by general interest rates. 

There is a vast difference between government regula- 
tion and government ownership. Much may be said in favor 
of private ownership and its control of management, with 
its profit-and-loss incentive, as compared with public 
ownership which lacks, relatively, this important stimu- 
lant to the production of satisfactory products or services 
at low cost. But a universal need for adequate service 



* DOMESTIC AND FOREIGN TRADE 23 

may, in some cases, off-set the disadvantage of a higher 
price, should the price be higher as a result of a public 
ownership. Or it may be desirable for the nation as a 
whole to accept, as a result of government ownership, a 
"loss" by fixing a price that does not cover the cost of 
production— entailing increased taxation. This was the 
case for many years in our postal service. But the less 
general the amount of service consumed by different in- 
dividuals or groups of individuals, the less justifiable would 
be government ownership which operates at a loss. 

In nearly all cases wherein privately owned industries 
are found to be operated without sufficient regard for the 
public welfare, government regulation may be exercised 
to gain the desired reforms— without the risks of govern- 
ment ownership. And the risks of actual management 
by government officials are obvious enough, particularly 
so in a democratic country. Especially do risks arise when 
an industry stands between two opposing interests repre- 
sented by masses of people on each side, such as hap- 
pens to be the case in the meat packing industry. 

The vast difference between public ownership and pub- 
lic regulation is important. But the ever present possibil- 
ity of public ownership, as well as public regulation, exer- 
cises a salutary influence upon industries that have the op- 
portunity to prey upon the public as a result of monopolis- 
tic control of supply or of demand. 

Apart from legal requirements, however, a genuine 
desire to foster public interests is now growing within 
many industries. This spirit arises from better apprecia- 
tion of the responsibilities of industrial management to 
labor and to the general public as well as to the owners 
of industries. That this progressive spirit will continue 
to spread seems probable because its basis is a sound 
estimate of the value of good-will which gains the coop- 
eration of the general public and of labor. This is a 
factor of vital importance in promoting profitable indus- 
trial operations. 



24 BREVITY BOOK ON ECONOMICS 

Such are the fundamental problems of domestic trade. 
Foreign trade is not essentially different from domestic 
trade. It arises from the same cause : mutual profit to 
traders. Frenchmen trade with Americans, for instance, 
for the same reason that one American trades with an- 
other. The people of different countries tend to specialize 
the same as people in different parts of the same coun- 
try. 

Division of industry among different countries tends 
toward specialization in commodities the production of 
which is encouraged by natural advantages, primarily the 
advantage of owning raw materials, produced at home, at 
relatively low cost. Climate and soil conditions, the nature 
of labor supply, the accumulated strength of industry, 
and even the temperament of the population are essen- 
tial differences. We look to France, for example, for 
certain fashionable commodities in the production of which 
excellent artistic taste is required ; while the United 
States excels in the production of many mechanical com- 
modities, such as farm machinery — the result of inventive 
genius coupled with unusual managerial ability in our 
factories. But essentially all of the foregoing differences 
are the same as those which underlie divisions of produc- 
tion within countries. 

The lazu of comparative real costs applies in the trade 
among different sections of one country as well as, among 
different countries. This law lies at the basis of all trade 
and all specialization, particularly regional specialization. 
Adam Smith illustrates the law thus : "The natural ad- 
vantages which one country has over another in producing 
particular commodities are sometimes so great that it is 
acknowledged by all the world to be vain to struggle with 
them. By means of glasses, hot beds, and hot walls, very 
good grapes can be raised in Scotland, and very good wine 
too can be made of them at about thirty times the expense 
for which at least equally good wine can be brought from 
foreign countries," The advantages of foreign trade, 



DOMESTIC AND FOREIGN TRADE 35 

which are very obvious in this case, are equally true in 
less obvious cases. 

Tariffs and many other restrictions tend to interfere 
with ideal specialization among nations. Principally on 
account of its influence on domestic trade and its con- 
venience as a means of federal taxation, foreign trade has 
been rigorously subjected to government regulation in 
many countries. 

"Free trade" is a big problem in nearly all countries. 
The theoretical argument for free trade is based upon 
the premise which states that the greatest good results 
when all nations work together like departments in a 
factory — each nation so specializing and coordinating its 
production with that of other nations as to gain the great- 
est net production of world-wealth. Protectionists believe, 
however, that a new country may remain undeveloped for 
a long time unless protection is afforded in the first stages 
of development, even though a high price for the time 
being has to be paid for the protection. They advocate 
protection for industries which are expected, sooner or 
later, to be able to stand on their own feet against foreign 
competition— after which time protection may be re- 
moved. This is often called the "infant industry" argu- 
ment. The future possibility of low-cost production in 
the industry, the domestic need for the product, the de- 
pendability and cost of importing the product, and espe- 
cially the law of comparative costs are some of the con- 
siderations in determining which industries should thus 
be protected. 

Self-sufficiency in event of war has also been a motive 
for the protection of many industries, especially of "key" 
industries, such as the making of dyes and chemicals, 
which support other industries. 

On account of the extreme intricacy of the tariff prob- 
lem and the lack of sufficiently complete and accurate in- 
formation concerning the effect of tariffs on the indus- 
tries involved— and the tariff affects nearly all industries 



26 BREVITY BOOK ON ECONOMICS 

either directly or indirectly — it seems impossible to arrive 
at a solution of the tariff problem which does not to some 
extent favor some interests more than others. But the 
ideal aim of tariff revision is to magnify the total gains 
and to minimize the total losses, and to approach as near- 
ly as possible fairness to all interests. The ever-present 
possibility of unfairness through lack of adequate in- 
formation, if net through less excusable causes, makes 
non-partisan and intelligent tariff revision exceedingly im- 
portant. 

Tariffs which give so-called incidental protection are 
often imposed primarily for the sake of revenue. Tariffs 
are also sometimes designed as retaliation against a coun- 
try that protects itself against importations of goods 
which the retaliating country desires to send to it, or be- 
cause the other country allows its producers a bounty on 
production and thus gives them an artificially low cost of 
production — which is considered to be unfair international 
competition. Many commercial treaties have been signed 
in order to avoid retaliatory tariffs. Tariffs are also em- 
ployed to prevent foreign producers from "dumping" 
goods at a price below their cost of production in order 
to demoralize the market for the home producers and drive 
them out of business, and thus possibly establish a monop- 
olistic market for the foreign product — and then raise the. 
price. 

The leading questions are: What industries, if any, 
shall be protected ; and shall protection be extended or 
curtailed, and where and how far? 

Historically, many countries have gone through stages 
of development somewhat as follows : 

1. The stage v/hen production is confined largely to the 
extractive industries, such as farming, forestry, trapping, 
and mining. This is the period, in newly settled countries, 
when free trade seems more desirable. The country is 
dependent upon other countries for manufactured products 



DOMESTIC AND FOREIGN TRADE 27 

and upon foreign markets for the sale of its surplus re- 
turns from nature. 

3. The stage when a country is striving to develop 
manufacturing industries to take care of domestic demand 
—to become less dependent upon other countries for im- 
proving the general standard of living, in so far as it is 
improved by the use of more manufactured products ; also 
for self-sufficiency and all the other benefits of diversified 
industry. This is the period when protection of home in- 
dustries seems to be desirable. 

3. The stage when the major manufacturing industries 
have developed capacity to produce quantities beyond the 
needs of the home market— when foreign markets are 
needed fof continued development. This is the period 
when protection of many industries seems unnecessary. 
The United States is now emerging into this stage. Eng- 
land reached it some time ago. 

Our government is now greatly encouraging the de- 
velopment of foreign trade. The Webb-Pomerene Bill 
permits cooperation among exporters without fear of vio- 
lating the anti-trust laws. A Foreign Federal Reserve 
Bank is being considered. Several large banks are rapidly 
extending their foreign branches. The United States is 
developing a merchant marine and is now a heavy creditor 
to many foreign countries, and is in excellent position to 
place loans where they will stimulate our export trade— 
for trade follows loans even more than it follows the 
flag. 

There is some danger, however, of excessive emphasis 
upon the development of exports and a corresponding 
neglect of imports. That we must buy if we would sell is 
an important truism which is sometimes overlooked. The 
war has emphasized this. Other countries, for instance, 
were largely prevented from trade with South America. 
We had visions of gigantic trade there, but it was soon 
found that South American countries could not buy much 
from us, because other countries, including ourselves, were 



28 BREVITY BOOK ON ECONOMICS 

not buying much from them. That we must buy goods 
or loan funds if we would sell is evident. All trade is 
essentially barter, or the exchange of goods for goods. 
The use of money and credit tends to hide this fact. 

The functions of money and of credit in connection 
with domestic and foreign trade are explained in the next 
chapter; also the question of a "favorable" balance of 
trade, the general desire for which would seem to be in 
the nature of a popular fallacy — for there is an important 
difference between the possession of money and the pos- 
session of economic goods. 



CHAPTER IV 

Domestic and Foreign Exchange 

Exchange is the mechanism of trade. It includes money 
and credit, and banking. 

Money is the medium of exchange which passes gen- 
erally current from hand to hand. Many things, at times, 
have been used as money : skins, ivory, beads, tobacco, and 
the like. But long ago the precious metals, gold and silver, 
were found to have most of the qualities desired in money. 
Gold is now the metal used to fix the value of the 
standard monetary unit in nearly all countries. An Amer- 
ican dollar represents a metallic value of 23.22 grains of 
fine gold (total weight, 25.8 grains .9 fine). All money 
in this country, other than gold coins, derives its value 
from the fact that our government will, on demand, ex- 
change gold coin for it at its par or face value. 

Our stock of money consists of gold pieces, silver 
dollars, subsidiary silver, nickel and copper coins, silver 
certificates, treasury notes, gold certificates, United 
States notes, national bank notes, federal reserve bank 
notes, and federal reserve notes. 

Federal reserve notes are issued by federal reserve 
banks and are secured by rediscounted commercial paper, 
gold reserves, and the general credit of the government. 
Federal reserve hank notes are issued against government 
bonds. They are virtually the same as national bank 
notes. The ultimate aim is gradually to retire both 
national bank notes and federal reserve bank notes and 
to let federal reserve notes take their place, because the 
federal reserve notes are issued to take care of the cur- 
rent commercial transactions, and are more elastic. They 
tend to expand in amount with expanding trade, because 
they are issued against deposits of commercial paper; 
they are required by law to flow back to the federal 



30 BREVITY BOOK ON ECONOMICS 

reserve banks when the securities against which they are 
issued, are paid; and thus the amount of them in circula- 
tion tends to vary with the demand for them to take care 
of domestic commercial transactions. It is hoped that 
their use will help in avoiding periodic currency inflations, 

Gold certificates are issued by the government against 
a reserve of gold equal in value to the par value of the 
certificates. Silver certificates were issued against cor- 
responding reserves of silver, while the treasury note 
of 1890 were backed by "coin," which the government 
interpreted as meaning gold. Both silver certificates and 
treasury notes are "hold overs" from the time when our 
government under the Bland-Allison Act of 1878, and 
the Sherman Act of 1890, purchased limited amounts of 
silver in an attempt to maintain the ratio of silver to 
gold at 16 to 1. 

If paper money is made legal tender; that is, if the 
law requires its acceptance in payment of debt, and yet it 
is not redeemable in gold on demand, it is known as 
fiat or forced money. Doubt may arise as to the probabil- 
ility of redemption and its value tends to depreciate ac- 
cordingly. The greenbacks, officially known as United 
States notes, issued during the Civil War, were fiat 
money. When the government finally offered to redeem 
them at par value in 1879, having accumulated a stock 
of gold for the purpose, they regained their full face value 
— and nearly all of them remained in circulation. 1879, 
therefore, is the date of what is known as "the resump- 
tion of specie payments." The willingness of the gov- 
ernment to redeem all paper money in gold maintains it in 
circulation at par value. 

If a country uses two metals as standard money, this 
practice is known as bimetallism. A fundamental argu- 
ment against bimetallism is found in Gresham's law, 
which states that when two kinds of money circulate 
side by side in a country and one kind is less valuable 
than the other, yet both are legal tender, the less valu- 



DOMESTIC AND FOREIGN EXCHANGE 31 

able money will be used in paying debts and the more 
valuable money will tend to be held out of circulation. 
This fact was observed by Sir Thomas Gresham in Eng- 
land during the reign of Queen Elizabeth, when new 
coins were put into circulation in the hope that they 
would replace clipped and debased coins. But the new 
and heavier coins soon disappeared, because their met- 
allic value was greater than the metallic value of the 
older and lighter coins. The metallic value of subsid- 
iary silver, nickles and coppers, being less than their 
face value, is a factor which helps keep them in circula- 
tion. 

When two different metals, such as gold and silver, 
are used as standard money, a fixed "mint ratio," such 
as 16 to 1, is established; that is, silver coins are minted 
to weigh sixteen times as much as corresponding gold 
coins. But the market value of each metal, in the form 
of bullion, depends largely upon the available supply of 
each metal, the cost of its production, and the demand 
for its use in industry. These causes of value cannot 
be arbitrarily controlled. The market value of gold bul- 
lion, for instance, may become thirty times as great as that 
of silver bullion. Yet the legal mint ratio would make 
coined gold worth but sixteen times as much as coined 
silver for use in making exchanges. Therefore, gold 
coins would be melted down and sold as bullion, or used 
in payments of balances due to foreign countries, or they 
would be hoarded. Silver bullion alone would be taken 
to the mint to be coined. Thus Gresham's Law operates 
against the success of bimetallism. 

Money is one of two kinds of exchange media. Credit 
instruments are the other kind. Broadly speaking, credit 
is purchasing power which arises principally out of the 
possession of the valuable things owned by individuals, 
partnerships, or corporations, such as houses, land, fac- 
tory buildings, machinery, raw materials, and so on. This 
is called "personal credit." It may be changed into more 



32 BREVITY BOOK ON ECONOMICS 

widely acceptable purchasing power in the form of 
money or of credit instruments — usually into "bank cred- 
it" or "deposits" against which checks are drawn. 

Credit instruments are written indications of willing- 
ness and ability to pay money. They may be roughly 
classified according to their range of acceptability. Money 
that is based upon the government's credit would come 
first — if one chooses to look upon it as a form of credit 
instrument. All lawful money, except gold and gold 
certificates, is sometimes called "credit money," because 
the government's credit maintains it in circulation at par 
value. There is not nearly enough gold in the country 
to redeem all paper money at one time. Gold reserves, 
however, are usually adequate for taking care of normal 
demands. 

Following "credit money" in range of acceptability are, 
perhaps, bank drafts and bank cashier's checks, bank 
acceptances and discounted bills of exchange (which have 
a bank's credit behind them, as well as the credit of both 
seller and buyer, as guaranty of payment) accepted 
drafts (drawn by sellers on buyers and accepted for 
payment in writing by the buyer, commonly known as 
acceptances) and checks. 

The foregoing list includes nearly all of those credit 
instruments which may be considered to be in circula- 
tion. Circulating credit instruments are distinguished 
from mortgages, bonds, and debentures which are not 
commonly used as media of exchange. 

Perhaps the volume of purchases paid for by the use 
of checks is greater than the volume paid for by the 
use of all other credit instruments ; and many checks 
are "cleared" without the use of money, in "clearing 
houses" maintained by banks in nearly all important 
cities. All checks received by each bank drawn on other 
banks are sent to the clearing house where the sum total 
of dollars drawn on each bank is balanced against the 
sum total of dollars represented by the checks each 



DOMESTIC AND FOREIGN EXCHANGE 33 

bank turns in on other banks. The differences are set- 
tled between the clearing house and the respective banks 
—thus saving each bank the trouble of dealing directly 
with the other members of the clearing house associa- 
tion. The point is that a huge volume of exchanges 
is made without the direct use of money. Furthermore, 
when the time comes for a credit instrument to be paid, 
another credit instrument may be used in making the 
payment. 

Possibly there is some formula which governs the 
amount of credit instruments which may be issued with 
gold as the direct or indirect basis of security, but such a 
formula is apparently not now determinable. Many credit 
instruments derive their purchasing power from commodi- 
ties or services other than gold. It may actually exist in 
the form of fixed or circulating capital, or merely in the 
form of the future earning power of a business or of an 
individual — services yet to be rendered. The gold dollar 
is merely the unit of value by which the values of other 
things are measured. 

But the extension of credit is based upon confidence 
in the debtor's willingness and ability to pay money 
when the time comes for payment. If money happens 
to be tight, confidence is somewhat shaken and the amount 
of credit-in-use accordingly tends to contract; and if 
money is easy, the amount of credit-in-use tends to ex- 
pand. 

In the event of a relatively sudden increase in the 
volume of business transactions, such as that caused by 
the war, a greater amount of money may be drawn into 
circulation and the rapidity of its circulation may be 
increased, and at the same time credit may be greatly 
expanded. But the expansion of credit tends to leap 
ahead of the expanding stock of money. Credit also 
tends to contract faster than the stock of money when 
the volume of exchanges suddenly decreases. Thus ex- 
pansion and contraction of credit alone becomes a 



34 BREVITY BOOK ON ECONOMICS 

prime cause of changes in the purchasing power of a 
dollar — in so far as the purchasing power of a dollar 
is affected by changes in the total amount of, relative 
to the demand for, exchange media in circulation. 

Because the amount of credit-in-use which arises out 
of an additional stock of money may not be accurately 
estabhshed, and as the amount of money and credit-in- 
use does not bear a constant ratio to the gold reserves, 
any statement that prices rise in direct proportion to an 
increase in gold production or even in proportion to 
changes in the money stock, must be greatly qualified. 

If, however, a method of controlling the total amount 
of exchange media in circulation, including both money 
and credit-in-use, could be devised so that the amount 
would automatically change proportionally with changes 
in the volume of exchanges, it seems that then the gen- 
eral purchasing power of a dollar would be held more 
stable. 

As suggested in Chapter II, economists are not in full 
agreement concerning the causes of general price 
changes, or changes in the purchasing power of the 
dollar. They agree, hov/ever, that deflation of credit- 
in-use and of money in circulation by means of building 
up a greater proportionate gold reserve, or by contrac- 
tion of the amount of credit-in-use — by raising discount 
rates, for instance — will tend to lower prices in general. 

The "purchasing power of a dollar" and *'the price ot 
the use of money," are, of course, quite different things. 
The use of money may be purchased at a price — known 
as interest when the price is paid at fixed times after 
the purchase, and as discount when the price is paid at 
the time of purchase. 

The price for the use of money varies (1) with the 
supply of and the demand for the use of money and (3) 
with the degree of risk involved in the loan. Rediscount 
rates, for instance, are lower than original discount rates, 



DOMESTIC AND FOREIGN EXCHANGE 35 

because, for one reason, some of the risk has already 
been taken care of in the original discount payment. 

The market price of the use of money rises and falls 
the same as the market price of other commodities, an ' 
with essentially the same modifications and for the same 
fundamental reasons — in response to the law of supply 
and demand, modified by monopolistic influences. The 
money market, like the market for other commodities, 
is the area wherein the use of money may be purchased 
at one price throughout the area, modified by the degree 
of risk involved and varying somewhat in some cases 
according to the bargaining skill of buyers and sellers, 
as in the case of many other commodities. 

New York is the central or largest market for money 
in this country, as it is for many other commodities, 
especially commodities which are exported or imported. 
New York being our most important port. Nearly all 
accounts of importers and exporters are settled or 
cleared in New York, also many large domestic accounts. 
New York is also the country's central market for large 
issues of investment securities. Many banks all over the 
country, therefore, have accounts with New York banks 
in order, for one reason, to facilitate payments in New 
York from all parts of the country, and because many 
New York banks always have a market for the use of 
"call" money to finance purchases of stocks and bonds 
for investment brokers. 

But because relatively large quantities of money are 
held in New York, any upheaval of conditions there is 
felt throughout the entire country. It was, in part, to 
avoid excessive concentration of the money supply in 
one place that Federal Reserve Banks were established 
in eleven other cities in different regions of the country, 
each serving all "member banks" in its region as the 
place of deposit for their legal reserves. 

This Federal Reserve Banking System was established 
primarily to increase (1) the mobility of reserves, with- 



36 BREVITY BOOK ON ECONOMICS 

out establishing one large bank, and (2) the elasticity of 
currency. The Federal Reserve Board, consisting of 
seven members, including the Secretary of the Treasury 
and the Comptroller of Currency, sitting in Washing- 
ton, has general supervisory power over the twelve re- 
gional banks in such matters as reserves and discounts 
rates. 

The regional banks may enter the open market and 
compete in the purchase and sale of many forms of credit 
instruments and thus become a factor in controlling the 
amount of money and credit in circulation by manipu- 
lating general discount rates. Thus the Federal Reserve 
System may cause a more even rate of discount through- 
out the country, and it may help to prevent panics by 
restricting excessive borrowing on one hand and by lend- 
ing more freely when advisable on the other hand. 

The Federal Land Bank Act of 1916 provided for the 
establishment of twelve federal land banks in selected 
parts of the country, under the supervision of a Federal 
Farm Loan Board. The banks and their branches make 
long-time loans at 6% interest to associations of borrowers 
who desire money for agricultural purposes. This Act 
also provides for joint stock land banks in much the 
same way. Federal land banks are now being established 
rapidly, especially in the West, where the rate of interest 
on farm loans tends to exceed 6%. 

A rigid classification of banks seems impossible. 
Private banks and state and national banks, whether they 
be savings banks, trust companies or commercial banks, 
including investment banks, nearly all now offer many 
forms of banking service. Perhaps the main line of 
demarcation, however, is between commercial banks, 
which deal primarily in short-term loans, and industrial 
or investment banks, which deal mainly in relatively long- 
term loans. 

The responsibility of banks, as distributors of capital 
funds, is linked closely with the welfare of nearly every 



DOMESTIC AND FOREIGN EXCHANGE 37 

business enterprise ; for business is now largely conducted 
"on credit" borrowed from banks. Transfers are made 
by debiting and crediting accounts — accounts between dif- 
ferent banks and accounts of depositors in individual 
banks. Little actual cash changes hands; and relatively 
little money is shipped back and forth between cities. 
This is why the modern world can do an immense volume 
of business by means of relatively a small amount of 
money and of gold. Our modern credit system is the 
great contribution of banks to business enterprise. They 
are specialists in supplying business men with exchange 
media as needed. 

A bank is in position to extend an amount of credit 
in excess of the amount of gold and other money in its 
vaults. But it is "out of business" as soon as it fails to 
meet its demand obligations. To guard against this con- 
tingency a bank must always keep in reserve some gold, 
or other lawful money. The amount of lawful money a 
bank must always have available is to be determined in 
each case by experience. It must have enough to meet 
the daily calls for money to be paid out, allowance being 
made for what comes in every day. Its customers seldom 
want money; they almost always want "credit," repre- 
sented by the right to draw checks. Usually the law re- 
quires a bank to keep reserves of lawful money equal to 
from five to thirty-five per cent of its demand liabilities, 
but this is merely attempting to enforce by law what is 
the first rule of good banking practice without it. The 
limit set by this consideration, of course, is very elastic, so 
that banks are almost always in a position to underwrite 
the personal credit of any one who really has any to 
underwrite, though they may not always be in a position 
to accommodate him at as low a rate of interest as he 
would like. 

A federal reserve bank, however, is required to maintain 
reserves in gold or lawful money of at least thirty-five 
per cent of its deposits. Member banks in a central 



38 BREVITY BOOK ON ECONOMICS 

reserve city — New York, Chicago, or St. Louis — have to 
maintain reserves amounting to at least thirteen per cent 
of its demand deposits and three per cent of its time 
deposits; in other reserve cities, ten per cent of its de- 
mand deposits and three per cent of time deposits; and 
outside of reserve cities, seven per cent of demand deposits 
and three per cent of time deposits. 

Small reserves, many assets which can be quickly con- 
verted into cash, and constant watchfulness put banks in 
a position to extend credit accommodation to those who 
are of good repute and of good prospects. 

The main constituent of the bank reserves, in every 
country, is and ought mainly to be gold, although this 
gold need not be kept in every case in the vaults of the 
bank which owns it. The modern world has taken its 
stand firmly upon the gold standard, buttressing its other 
money and its various credit instruments by intricate 
provisions to make it possible for their holders always 
to get gold and to get it promptly. It has also invented 
and developed various ingenious methods of carrying on 
business "on credit," through the offsetting of claims, 
thus effecting great economy in the use of money and 
imposing upon bankers a great responsibility for the finan- 
cial affairs of the entire business world. 

Such are the main aspects of domestic exchange. As 
between domestic and foreign trade so between domestic 
and foreign exchange — exchange here meaning the mech- 
anism of trade — there are no essential differences. 
Foreign exchange is also, very largely, the balancing of 
debits against credits, although it is somewhat more com- 
plicated by reason of the fact that the standard monetary 
units in different countries represent different quantities 
of gold. 

Foreign exchange, in the technical sense, is the purchase 
and sale of orders for the payment of foreign money at a 
foreign point. Foreign accounts in nearly all countries 
are settled on the basis of gold alone. This would neces- 



DOMESTIC AND FOREIGN EXCHANGE 39 

sitate the transfer of great quantities of gold were it not 
for the mechanism of foreign exchange by which settle- 
ments are made without transferring very much gold. 
Highly simplified, this is the principle: If A, located in 
London, owes $1,000 to B, located in the United States, 
and if C, in the United States, owes D, in London $1,000, 
then C may pay $1,000 to B, both of them in the United 
States, and A may pay $1,000 to D, both in London. Thus 
A and C pay their debts and B and D collect what is due 
them without transferring gold. 

This principle is operated by means of the purchase and 
sale of bills of exchange. The typical bill of" exchange is 
an order drawn by a seller on a buyer, directing the buyer 
to pay a sum of money to some third party. These bills 
are of many different kinds ; they run for different lengths 
of time, through many banking channels, and are actually 
settled in many different ways. Exporters sell them to 
banks, who use them to build up in London, or elsewhere, 
funds against which they draw their own bills to sell to 
American importers. 

The rate of foreign exchange is the price, in the money 
of one country, of one unit of the money of another coun- 
try payable in that other country. For example, an 
American importer buys, with American dollars, British 
pounds payable in London. The amount of gold in a 
pound sterling is the value of the amount of gold in 4.8665 
dollars. Therefore, $4.8665 is the par value of a pound 
sterling. The importer pays more or less than par for 
pounds payable in London according to current rate of 
exchange. This rate, under normal conditions, tends to 
fluctuate with changes in the supply of and the demand for 
bills of exchange payable in London. But rates of foreign 
exchange, under normal conditions, will not fluctuate 
VN^idely. It costs normally about two cents a pound sterling 
to ship gold from New" York to London. Therefore, if 
the price of London exchange goes above, say, 4.886, the 
American importer would find it cheaper to pay his bill 



40 BREVITY BOOK ON ECONOMICS 

by shipping gold ; and if London exchange goes below, say, 
4.846, the American exporter would find it cheaper to 
collect his bill by having gold shipped from London. 
Thus 4.846 is sometimes called the "gold import point," 
the point below which gold will tend to flow into New 
York, while 4.886 is the "gold export point," the point 
above which gold will be sent from New York to London. 
As a matter of fact, the exporters and importers them- 
selves seldom ship gold; the banks do this. 

The rate of exchange on other countries is established 
in the same way and varies for the same fundamental 
reasons. The rate of exchange on Paris, however, is 
quoted in francs instead of in dollars. 5.18^, for example, 
means that five francs and 36^ centimes, payable in Paris, 
can be purchased here for one American dollar. 

Theoretically, changes in the rate of exchange are sup- 
posed to help bring about equilibrium of exports and 
imports. As already suggested, the supply of bills comes 
mainly from exporters ; the demand for them, mainly from 
importers. Therefore, an increase of imports over exports 
tends to cause the demand for funds payable abroad to 
increase relative to the supply which arises mainly from 
exports — causing a higher rate of exchange. A higher 
rate of exchange causes importers to pay more for their 
merchandise and so tends to discourage imports. A high 
rate also tends to increase exports, and hence to increase 
the supply of bills offered for sale. A .low rate of ex- 
change results, normally, from an excess of exports over 
imports — increasing the supply of funds payable abroad 
relative to demand. But a low rate causes exporters to 
get less for their merchandise and so tends to discourage 
them from exporting; and, at the same time, it tends to 
encourage importing. Thus it may be said that fluctua- 
tions in the rate of exchange tend to help keep the amount 
of exports and imports in equilibrium; that excesses of 
exports and imports tend to be automatically reversed by 



DOMESTIC AND FOREIGN EXCHANGE 41 

the changes in the rate of exchange which they them- 
selves cause. 

Pronounced differences in the general price levels of 
two or more countries also tend to be automatically elim- 
inated. If commodity prices are relatively low in the 
United States as compared to prices in England, for 
example, our exports to England, other things equal, tend 
to increase relative to imports. This increases the supply 
of exchange payable in London, which tends to lower the 
rate of London exchange. If the rate goes below 4.8465. 
gold will begin to be shipped from London, as explained 
above. More gold here tends to decrease its purchasing 
power, causing higher prices, which tend to encourage 
imports and to discourage exports. And so, again, move- 
ments of gold, as affected by changing rates of foreign 
exchange, tend to help keep imports and exports in bal- 
ance, causing prices in various countries to seek about 
the same level. Such is the tendency under normal con- 
ditions. During the war interested countries placed 
restrictions upon the export of gold, so that variations in 
rates of exchange were deprived of the usual corrective. 
They may not become "normal" for a long time. 

The credits of one nation tend to be balanced by its 
debits against other nations. A "favorable balance of 
trade" is largely mythological— when both "visible" and 
"invisible" exports and imports are considered. Visible 
exports and imports are those which are commonly in- 
cluded in government reports, including, in nearly all 
countries, exports and imports of gold as well as mer- 
chandise. Invisible exports and imports are those which 
are not commonly included in government reports, such as 
tourists' expenses, oceanic transportation charges, invest- 
ments in foreign securities, money sent home by immi- 
grants, and so on. The total of both visible and invisible 
exports will, in the long run, equal the total of both visible 
and invisible imports. 
In this respect— and in nearly all other respects, except 



42 BREVITY BOOK ON ECONOMICS 

in the intricacy of its mechanism and in the amount of 
governmental restrictions involved — foreign trade is not 
different from domestic trade. The debits of any town, 
or of any one part of the country, in its "foreign" trade 
with other parts of the country, are balanced by its credits. 
Again, it must be remembered that all trade is essentially 
barter, or the exchanging of goods for goods, although 
this result is brought about indirectly by the use of money 
and credit instruments. 

Money, as such, and credit instruments are not 
themselves real wealth. They cannot be eaten, or worn, 
or directly consumed in any way. Money and credit are 
merely the mechanism of modern trade by which commod- 
ities and services from one locality or country are ex- 
changed for commodities and services from another 
locality or country. Domestic and foreign exchange 
permits the very high degree of specialization in produc- 
tion treated in the next chapter. 



CHAPTER V 

The Production of Wealth 

Production is the process of adding utility, or want- 
satisfying power, to nature. Labor and nature are the 
main factors in production, aided in nearly all cases by 
capital goods. In economics, nature, also called "land," 
includes air, water, minerals, rock, wind, soil, forests and 
uncultivated vegetation of all kinds ; in short, substantially 
all things that are supplied grattiitously by Providence. 
Labor is any human exertion, mental or physical, which 
adds want-satisfying properties to nature. Instruments 
formed by nature and labor for use in producing more 
wealth, such as buildings, machines, and tools, are capital 
goods, the third basic factor in production. 

Capital goods are commonly classified on the basis of 
the length of time they serve as a productive factor with- 
out replacement, into fixed and circulating capital. Fixed 
capital goods survive many acts of production before com- 
plete replacement, as in the case of nearly all tools and 
machines; while circulating capital goods survive but one 
act, or at least very few acts, of production, as in the 
case of coal. Capital goods are also sometimes classified 
on the basis of the freedom with which they may be used 
for various purposes, into free and specialised capital. 
Free capital goods may be used for relatively many pur- 
poses, as in the case of many factory buildings of stand- 
ard construction; while specialized capital goods may be 
used for only one purpose, or at least for, relatively few 
purposes, as in the case of machinery built especially for 
one unique operation. 

Production may be analyzed with reference to the kind 
of utility added. The form of a commodity may be 
changed, such as molding iron into castings. This is add- 
ing form utility. The place of a commodity may be 
changed, such as transporting grain from Kansas to New 



44 BREVITY BOOK ON ECONOMICS 

York. This is place utility, A commodity may be stored 
until wanted, as in a retail store. This is adding time 
utility. The want-satisfying power in nature's products, 
such as coal, iron and jewels, as it exists before the 
application of labor or capital, is sometimes called 
elementary utility. 

Transportation and mercantile enterprise, as well as 
manufacturing, produce wealth. They add place and time 
utilities to commodities, without which the addition of 
form utilities, under the present industrial and commercial 
system, would be all but useless. Teaching school and 
practicing law or medicine are also productive ; they pro- 
duce services. Selling and accounting are productive 
occupations. Selling aims primarily to facilitate the 
process of adding place and time utilities. Keeping 
accounts and other records helps in adding all forms of 
utility to nearly all kinds of commodities. Our modern 
exchange system, including money and credit and banking, 
also facilitates the addition of want-satisfying power to 
commodities. Nearly all business activities, in fact, are 
productive, for most of them afford utility to somebody 
in some form. True, some occupations and professions 
are more directly productive of form, time, or place util- 
ities, than others, and some have greater weight than 
others in adding these utilities ; but their weight, as a 
factor in gaining a large output at a small cost, may vary 
inversely with their directness. 

To create utilities to be used up in consumption is the 
ultimate result of production. We produce to consume. 
Consumption is an end in itself ; production is the means to 
that end. This conception of the relation of production 
to consumption is the basis of modern standards which 
control the kind, quality, and quantity of commodities 
produced. 

Perhaps the most important features of modern pro- 
duction are (1) the use of capital and (2) the division 
of labor. Capitalistic or ''indirect" production involves the 



THE PRODUCTION OF WEALTH 

use of capital goods already produced; it differs from 
"direct" production in that it employs tools and machines, 
while the other produces goods directly by hand. 

The production and the utilization of capital goods 
requires saving, waiting and investing, which require 
the foregoing of present consumption — for the sake of 
greater future consumption. Experience shows that as a 
general rule the more indirect the method of production is, 
the greater is the output in proportion to the amount of 
productive energy expended. A big factor in accomplish- 
ing this result is increased opportunity for division of 
labor. 

Division of labor, broadly defined, includes localmition, 
or concentration of individual industries within certain 
countries, and within certain parts of countries or towns, 
as well as the continuous use of workmen or of groups 
of workmen on relatively few operations. The latter is 
sometimes called functional division of labor or functional 
specialization. It reduces the number of tasks performed 
by individual workmen. This facilitates the selection of 
the best fitted workers for specific tasks — with less waste 
of superior skill and ability on relatively easy jobs. It 
also permits both greater and more constant use of tools 
and machinery, and it avoids the expense of long appren- 
ticeships. In fact, highly specialized capitalistic produc- 
tion is a prime cause of increases in national wealth which 
permit improvements in standards of living. 

Progress in production from early times may be roughly 
divided into several periods as follows : 

1. The Early Period — when one man, with his own 
labor and land and with capital or implements fashioned 
largely by his own labor, produced mainly for his own 
consumption and for that of his immediate family; 
wherein virtually no division of labor was employed. 

2. The Craft Period— when division of labor began to 
play an important part in production. Distinct separation 
of the ownership and control of capital goods and labor 



46 BREVITY BOOK ON ECONOMICS 

and land arose. Labor began to work for wages. Land 
was beginning to be rented, and capital to be borrowed. 
Specialized crafts, arising out of occupational division of 
labor, came into existence. 

3. The Machinery Period — when inventions of labor- 
saving machinery and methods began to develop rapidly. 
Fmictional as well as occupational division of labor arose. 
This is the period of the "Industrial Revolution," which 
began in England, about the middle of the eighteenth 
century, with the discovery of steam power, and gained 
tremendous impetus in the United States with important 
inventions early in the nineteenth century, notably the 
application of steam to navigation in 1807, and to railways 
about 1830. This period shows steadily increasing sep- 
aration of the ownership of land, labor, and capital. Its 
chief features continue to characterize the present period. 

4. The Modern Period — marked by extended develop- 
ment of machine production, extensive development of 
domestic and foreign trade, and by rapid development of 
large-scale production with its intensive functional divi- 
sion of labor. This is sometimes called the capitalistic 
period. In it the corporate form of organization was 
introduced, permitting a wider and more complete sep- 
aration of the ownership from the direct control of indus- 
tries. Combinations and consolidations of industrial enter- 
prises also developed, resulting in concentrated financial 
control of many separate industrial plants. Operating a 
business on bank credit is perhaps the chief characteristic 
of the period. 

The present-day period could perhaps be called the 
scientific era of production — the beginning of the use of 
consciously scientific methods, as explained later on. 

The fundamental problem in production is the creation 
of the greatest amount of wealth at the least cost. Money 
cost, or expenses of production, are distinguished from 
real cost. We naturally figure costs in terms of money. 
But cost may be estimated in terms of wealth used up, of 



THE PRODUCTION OF WEALTH 47 

labor expended, of hardships endured, of health jeop- 
ardized and destroyed, and so on. 

It is hard to define real costs exactly, and it is even 
harder to determine how far they are truly representative 
of money costs. Excessive reductions in money cost often 
entail increased hardships to labor. Whenever a reduction 
in money costs does involve an increase in real costs, 
labor and society as a whole lose, although the owners of 
the business may gain. Labor legislation in general is 
designed to cut down real costs. 

A constantly increasing number of progressive business 
enterprises voluntarily use more of the means of reducing 
real costs than are required by law, as by introducing 
exceptionally good working conditions and many kinds of 
welfare work. Such measures, by increasing the efficiency 
of workers, often decrease money costs as well as real 
costs. 

Forward looking administrators are now more than ever 
inclined to find out what labor wants and needs to make 
it more efficient and more contented. Increasing mutual 
recognition of what is wanted by both labor and capital — 
each more accurately knowing what the other wants — 
will tend to increase the willingness and ability of each 
to cooperate with the other; and, at the same time, the 
opposing interests of capital and labor will tend to be 
promoted more intelligently on both sides of the conflict. 
This is an exceedingly important requirement in reducing 
the costs of production. 

One leading manufacturer now analyzes the wants of 
his labor, in the order of importance to labor, as follows : 
(1) a fair money wage, (2) good working conditions, 
(3) a share in the management, (4) a share in the profits, 
and (5) welfare advantages, such as clubs, restaurant 
service, and workmen's cooperative associations, such as 
cooperative stores, building and loan associations, and 
so on. This manufacturer adds that a sincere "square 
deal" policy must be the motive of all the foregoing points, 



48 BREVITY BOOK ON ECONOMICS 

and that cooperative aids to workmen do best when 
actually controlled and operated by the workmen them- 
selves. 

Modern large-scale production, or the production of 
relatively large quantities of a commodity in a single 
industrial plant or in several plants under a single man- 
agement, is largely the result of the inventions of mechan- 
ical power-driven machinery. It is also the result of 
increased market areas which are made possible by means 
of improved facilities of transportation and communica- 
tion. 

The efficiency and number of competing units within an 
industry, the potential demand for the products or services 
of the industry, the law of diminishing returns, explained 
later on, legal restrictions on monopoly, and managerial 
ability are the main factors which determine the maximum 
size that may be attained by a single unit in any industry. 
All of these factors may and do tend to vary from time 
to time, and it is always difficult to predict the maximum 
development of the scale of production in a given indus- 
trial unit. 

Competition as a limiting factor is fundamentally a 
problem of comparative cost per unit of product delivered 
to the ultimate consumer, including all costs of distributing 
and selling. Variations in cost result mainly from varia- 
tions in costs of raw materials and supplies, labor, capital 
invested, administration, and selling costs. Large-scale 
production may, up to a certain point, be so employed as 
to reduce all these items of cost. 

Perhaps the greatest economy of large-scale production 
is increased opportunity for specialization and division 
of labor. As already suggested, greater specialization 
means reduction of the number of responsibilities and 
activities assumed by individual operating units in produc- 
tion, both units of men and of mechanical equipment. 
This permits greater standardisation, meaning greater uni- 
formity in productive processes, resulting in greater out- 



THE PRODUCTION OF WEALTH 49 

put for every dollar of expense incurred. Standardization 
is one of the most marked characteristics of modern 
industrial processes, equipment, and products. It seems 
possible, however, to carry standardization so far as to 
destroy some of the individual initiative of the worker. 
But closer cooperation between employers and employees 
helps to prevent this outcome. 

Administrative problems are now urgent. Organization 
and management are the main divisions of administration. 
Organization, fundamentally, is the division and arrange- 
ment of all the physical and human factors in a business. 
Management supervises the activities of the organization. 
Good management rests upon good organization — for 
which the management is responsible and of which it is 
a part. While organization involves division of both 
physical and human factors, management, as such, involves 
only the division of human responsibilities ; and these 
human responsibilities must be supervisory in nature to 
distinguish them from skilled or common labor. 

Scientific management is the use of scientific methods 
in discharging the responsibilities of management. These 
responsibilities are, first, the attainment and maintenance 
of scientific organization — that division and grouping of 
all functions of a business so that each function and all 
of them together may be performed in the one best way. 
In the second place, scientific management holds itself 
responsible for the use of the organization at its com- 
mand, so that each part shall be loaded with responsibil- 
ities to its full capacity, so that no part shall be over- 
loaded, so that each part shall discharge its assigned 
responsibilities at the least cost, and so that cooperation 
and coordination of all parts within the business shall be 
best conserved and promoted. 

Management is scientific in so far as scientific methods 
are employed in achieving the foregoing objectives. 
Scientific methods, more specifically, are those which deter- 
mine the best available materials, tools, equipment, and 



50 BREVITY BOOK ON ECONOMICS 

processes by means of accurate comparative observations 
and measurements of the time and space employed in 
processes and of the material qualities in supplies, tools, 
and equipment. These scientific methods are in contrast 
with so-called rule-of -thumb practice, which relies on 
traditional methods passed along from time to time with 
their accumulation of improvements acquired largely in 
hit-or-miss experience — without any deliberate attempt to 
acquire them except from occasional efforts which, as a 
rule, are forced by immediate necessity. Thus the main 
difference between scientific and unscientific management 
is a difference in the degree of conscious deliberation 
employed in the effort to lower the cost of production. 

Scientific methods have been employed intensively (1) 
in establishing standards for the best speeds at which 
machines may be operated, including alterations in tools 
and machines which make maximum speeds possible, and 
(2) in finding the most economical movements or motions 
by which the laborer may accomplish his task, including 
improvements in working conditions which permit the 
worker to perform his task in the least time and with the 
least effort. Another specific aim is the payment of differ- 
ential wages to workers — wages designed to parallel indi- 
vidual differences in accomplishment, including consider- 
ation of the part played by the individual laborer in 
reducing "capital costs" by increasing his product per unit 
of time. These capital costs are rent on the space occu- 
pied by the laborer and his machine and materials, the 
money capital tied up in his machine and tools, supervisory 
expenses ; in short, all fixed expenses which accrue 
regardless of the laborer's output. 

It is apparent that the amount of fixed expenses per unit 
of product varies with the amount of the laborer's output 
per unit of time. If, for instance, the fixed expenses o 
operating one machine, apart from the cost of labor, is 
two dollars an hour, and one laborer uses that machine 
in producing 100 parts an hour, the overhead cost per part 



THE PRODUCTION OF WEALTH 51 

is two cents. If, as a result of improved management, the 
laborer produces 150 parts per hour, the fixed expenses per 
part would fall possibly to one and a half cents, saving 
fifty cents per hour. Part of this saving is often given to 
the laborer — the amount depending upon practical con- 
siderations, since an exact scientific determination of this 
amount is apparently impossible. 

Such "differential wages" are often used and the 
methods of computing them are sometimes quite com- 
plicated. The standard output per hour or day for one 
operation is often fixed by very careful scientific tests. 
Then the rate of wages per day or hour may vary with 
the laborer's ability to approach, or to surpass, the 
standard. 

Scientific management also includes a scientific division 
and assignment of functions among the managers and 
foremen, with a decrease in the number of functions 
for which they are individually held responsible. For 
instance, in a scientifically managed manufacturing plant, 
we may find the "speed boss" who is responsible solely for 
running the machines at the best speed, and the "repair 
boss," whose sole responsibility is to see that machines 
are kept in good repair. This is often called functional 
management. 

In general, scientific specialization aims to employ ex- 
ceptional talents more exclusively on the kind of work 
which requires them. The main line of division is between 
brain work and manual labor. The "planning department" 
may include a large number of specialists who plan all 
operations down to the detailed specifications of the men, 
machines, methods, and materials to be used, and the 
order in which they shall be used, in putting through 
each new job. 

Current development in scientific management lies in 
the direction of specialization in solving general adminis- 
trative problems which tend to become more serious and 
more difficult to handle the larger the scale of production. 



53 BREVITY BOOK ON ECONOMICS 

A very general limitation on the scale of production is 
found in the economic lazv of diminishing or non-propor- 
tional returns. This law, first applied to land, states that 
if more and more men are set to work on a piece of 
land, the time comes sooner or later when the output of 
the last man added becomes less than the output of the 
man added before him. This may be called the "point of 
diminishing returns," but it is not necessarily the point 
of diminishing returns per man; for it is possible, although 
improbable, that an additional man may add relatively 
less returns than the man added just before him and 3^et 
cause the average return per man to be higher. 

When the average return per man begins to fall as 
more men are added, this is sometimes called "the point 
of diminishing productivity'' to distinguish it from "the 
point of diminishing returns." Some economists, however, 
make no distinction between them. (In the following dis- 
cussion, the author has in mind the point of diminishing 
average returns or the point of diminishing productivity, 
when the point of diminishing returns is mentioned.) 
Up to this point of diminishing returns, the output per 
man increases or at least remains stationary. The sig- 
nificant fact is that there must be, sooner or later, when 
additions of labor — or of capital, or of both labor and 
capital — are indefinitely applied to a piece of land, a point 
where the returns begin to show a decrease in proportion 
to the amount of labor — or of capital, or of both labor and 
capital — that is added. 

It is apparent that this law applies to additions of labor 
and of capital in manufacturing industries as well as in 
agriculture. Sooner or later, in the development of any 
enterprise, a point is reached after which additions of 
labor and capital do not yield a proportional increase in 
product. However, the point of diminishing returns, or 
the point of diminishing productivity, does not necessarily 
fix the point of practical maximum development of an 
establishment. That maximum is determined by the point 



THE PRODUCTION OF WEALTH 53 

of greatest attainable net profits — the point at which the 
total cost of production and total income from sales show 
the greatest possible difference. 

This law is of great practical significance in its applica- 
tion to a single manufacturing establishment. It is a 
danger signal to a manufacturer when the expense of 
additions of labor and capital in his plant begin to cause 
an increase in the cost per unit of his product. Other 
things equal, it is the time for him either to increase the 
size of his plant or to establish a new plant. But, again, 
this is not necessarily the point at which he will stop 
adding labor and capital in the old plant. That, as 
already stated, depends upon the point of maximum net 
profits which may or may not permit an increase in cost 
per unit of product. It may be said that an individual 
manufacturer can profitably increase his additions of 
labor and capital up to or beyond the point of diminishing 
returns, provided only that he can find a market for his, 
total product at a price which would yield him a better 
total net profit. 

One of the prime reasons for cost accounting is to 
determine the point of diminishing returns — in depart- 
ments and in subdivisions of departments, as well as in 
the establishment as a whole. 

Scientific management, in its effort to lower costs of 
production, tends to drive the point of diminishing returns 
further and further ahead in any industrial unit. But 
the applications of scientific methods must also always 
be limited by the profit and loss account. 

In general, the business man's problem of production is 
to employ the best combinations of nature, labor, and cap- 
ital—the combinations which yield the best total net gain 
of product with the least real cost. His skill in accom- 
plishing this is his justification for receiving that share 
of the returns which are called profits. This is treated 
in Chapter VII. 

Economists are interested primarily in increasing the 



54 BREVITY BOOK ON ECONOMICS 

productive capacity of capital and of labor, and in de- 
creasing the real costs of production in general. They 
desire the attainment of "economic equilibrium" in the 
production and the consumption of wealth, with a con- 
tinuous increase in the number of wants, particularly the 
"higher" wants, that may be satisfied, and with continuous 
improvement in the means of satisfying many wants. 

The World War upset this equilibrium. True, decreased 
production of some things in some of the warring coun- 
tries was perhaps more than balanced by increased produc- 
tion of many of these things in other countries. But lack 
of adequate transportation facilities, the risks, the delays, 
and the high cost of shipping, among other causes, made 
much of the world's stock of materials and products un- 
available when and where they were needed — entailing 
considerable actual loss, especially of perishable goods. 
Furthermore, although production as a whole was in- 
creased, the production of commodities which were rel- 
atively non-essential in time of war, was greatly curtailed. 
Surplus stocks were exhausted. The stocks of many com-' 
modities fell far behind the potential peace-time demand 
for them. There is now, therefore, great need of 
emphasis upon both increased production and upon wa,«te- 
less consumption, in order to recover, as soon as possible, 
the normal equilibrium of supply and demand. 



CHAPTER VI 

The Consumptio7i of Wealth 

It has become traditional to include the subject of 
consumption among the main divisions of economic 
science on the same level with production, exchange, and 
distribution. But as yet, few economists have found 
very much, relatively, to say about consumption. Perhaps 
the main aspects of this division are (1) the application 
of the principle of marginal utility in selecting the wants 
that are satisfied, (2) the statistics of consumption, (3) 
necessities and luxuries, (4) saving and spending, and 
(5) consumers' cooperation. 

Most consumers have a limited income to spend and 
are faced with the question of how to spend it so that 
they can get the most for their money. If they spend 
more in satisfying one want or one group of wants, they, 
of course, must spend less in satisfying other wants. It is 
here that the principle of diminishing utility, explained 
in Chapter II, is of some significance. It applies to each 
particular kind of goods bought for consumption. Thus 
a man might spend five dollars for a pair of shoes and 
then five dollars more for a second pair, and he might 
possibly buy even a third pair. But after he has the first 
pair, or the second, or the third, he will not want an 
additional pair intensely enough to justify its purchase 
in view of the fact that the same five dollars would bring 
him more satisfaction if spent, for example, for a new 
hat, or for amusement of some kind. There is also a 
point beyond which he will not spend money for hats or 
amusement. What he tends to do, in reality, is to carry 
his purchase of each particular kind of goods or services 
to such a point that he will get as much satisfaction out 
of one dollar spent along. one line as for one dollar spent 
along another. A dollar, then, represents to him a certain 
amount of utility, corresponding to the amount of satis- 



56 BREVITY BOOK ON ECONOMICS 

faction he gets from the expenditure along any of the 
lines involved. For persons with large incomes, of course, 
the marginal utility of a dollar is usually less than it is 
for persons with smaller incomes. 

Some careful studies have been made in order to find 
out just what differences are to be found in the expend- 
itures of families of different incomes. All these studies 
have tended to show that for food, the poor spend a larger 
percentage of their income than the middle class and the 
rich; that the percentage spent for rent, fuel, and light 
is about the same, regardless of income ; that the per- 
centage spent for clothing is also about the same; and 
that the percentage spent for legal protection, health, 
and comforts increases as the income increases. These 
studies, in other words, confirm common observation, 
which shows that surplus income is likely to be spent for 
the satisfaction of the ''higher wants." Exact figures 
obtained by such studies are often of great use to social 
workers and to public authorities who are interested in 
establishing the meaning of a decent standard of living 
and in taking measures to bring the earning capacity of 
individuals and families up to the point necessary to 
enable them to live according to such a standard. 

The discussion of necessities and luxuries requires some 
attempt to distinguish between them. No sharp distinction 
seems to be possible, because articles that seem like lux- 
uries to a young man of twenty on a salary of twenty 
dollars a week, because they are out of his 
reach, come into his reach, perhaps, by the time 
he is thirty and has an income of, say, fifty dollars 
a week. He buys them, forms the habit of using 
them, comes to think of them as necessary, and stops 
looking upon them as luxuries. About the only practical 
importance of distinguishing necessities from luxuries 
arises out of the growing popular belief that industry 
ought to produce necessities for everybody before it pro- 
duces any luxuries for anybody. This proposition means. 



THE CONSUMPTION OF WEALTH 57 

for instance, that until the masses of people are well fed 
and well housed, there is something wrong about allow- 
ing anybody to have broiled lobster and two or three 
country houses. This proposition seems obvious enough. 
The only difficulty about it arises from the fact that the 
opportunity to spend one's income as foolishly as one 
likes, seems to be a strong motive for causing many 
people to earn a large income. Remedies suggested range 
all the way from admonishing the rich against ostentation 
to advocating such public ownership and operation of 
industry as would permit the limiting of all incomes to 
some level close to that of the present average income. 

The contrast between saving and spending, as these 
topics are commonly discussed, is in reality a contrast 
between two different kinds of spending : one upon 
articles of immediate consumption, such as clothes ; the 
other upon articles that may be used in production, such 
as buildings and machines. It is plain that retail clothiers, 
for instance, rejoice when people spend more money for 
clothes. But if people save this money instead and invest 
it perhaps in the stock of a shoe factorj^ where it may 
be used for adding to the machinery, an ultimate increase 
in the output of shoes will result — or it may, of course, 
be invested in any other productive industry. Many 
people who wish to buy the products of industry, shoes, 
for example, will not sympathize too much with the idea 
that people with money ought to spend it upon articles for 
their own consumption instead of investing it where it 
will increase the production of shoes. 

It might be mentioned, on the other hand, that the 
incomes of some people are too small to justify any 
attempt on their part to save much money for the purpose 
of accumulating capital; for example, to deprive their 
children of really necessary clothes in which to attend 
school in order that money may be laid away in the bank. 
This may do the children more harm than will be com- 
pensated by the advantages derived from the use of this 



58 BREVITY BOOK ON ECONOMICS 

money as borrowed from the bank for some industrial 
purpose. 

It seems to be a mistake to think of ostentatious 
extravagance as justified on the ground that "it causes 
employment for labor." One thousand dollars spent on an 
expensive banquet does cause employment for labor — 
that of caterers, waiters, florists, and so on; but, of 
course, that same one thousand dollars, if invested in a 
manufacturing enterprise, for instance, would cause per- 
haps much more employment for labor. Factory em- 
ployees, therefore, could not be expected to accept argu- 
ments advanced to defend expensive banquets. 

There is a growing feeling on the part of consumers that 
they are at a commercial disadvantage as compared with 
producers and middle men. When they see prices rising, 
for instance, it often seems to them as if producers were 
taking advantage of their position to exploit the ultimate 
consumer. This feeling sometimes prompts them to . 
attempt combinations of consumers patterned after the 
combinations of producers and dealers that are believed to 
be so numerous. They hope that their combined buying 
power will enable them to obtain lower quotations and 
also that their ability to boycott some single article, such 
as eggs, will force a decline in its market price. The idea 
back of this remedy is sound enough. Practical difficulties 
in executing it arise from the large number of consumers, 
from their lack of acquaintance with one another, and 
from the fact that the possible saving for each individual 
is not likely to be large enough to enlist his interest for 
a very long time. Every such attempt also meets the 
problem of finding somebody to run the organization of 
consumers without requiring a salary that would absorb 
all the gain. A surprising fact, however, demonstrated by 
Belgian experience, is that good managers for enterprises 
conducted on the cooperative principle can be obtained, 
under favorable circumstances, at lower salaries than 



THE CONSUMPTION OF WEALTH 59 

the same men could command in private enterprises of 
the usual type. 

Consumers' cooperation seems to work best when it 
takes the form of financing retail stores for the benefit 
of the members of the cooperative association, who turn 
their patronage so far as possible to their own store. 
Such stores have been widely established in England and 
elsewhere. A considerable number of them are now in 
the United States. Sometimes a group of such retail 
stores are combined for the purpose of running a whole- 
sale store. The movement in this direction has been 
steadily growing, especially where members of the co- 
operative association belong to the same class of buyers 
and have some strong common interest to bind them 
together. Sometimes this interest is an almost religious 
faith in the cooperative principle; more often it is an 
outside interest, such as that which grows up among the 
members of the same trade union, or among the members 
of a group of reformers, such as socialists, who make 
out of the cooperative enterprise a kind of neighborhood 
center and a center of propaganda. 

One of the principal reasons why economists have 
never found much to say about consumption is because 
the amount of goods and services available for consump- 
tion depends altogether upon the efficiency of production. 
Yet wastes of consumption amount to the same thing as 
curtailment of production. To more wisely select the 
wants to be satisfied, to make better selection of the means 
of their satisfaction, and to gain the greatest possible sat- 
isfaction out of the means selected to satisfy wants ; such 
seem to be the principal aims of economic consumption. 
The spreading habit of "keeping books" for the household 
is an important step in this direction. The solution of 
the problem rests largely upon the shoulders of the 
individual — and the individual will perhaps do more 
intelligent spending and saving and better investing when 
he catches a broader vision of the force of wasteless con- 



60 BREVITY BOOK ON ECONOMICS 

sumption as a factor in raising the general standard of 
living, including its influence upon his own individual 
opportunity to satisfy more of his "higher" wants. 

Again, it is well to emphasize the fact that wastefulness 
in consumption amounts to the same thing as a decrease 
in the production of wealth. It is difficult, however, to say 
exactly v/hat constitutes wasteful consumption. Perhaps 
it may be said that all destruction of, or all the using up 
of, commodities and services in excess of the amount 
required for the satisfaction of wants, Is wasteful con- 
sumption. But whatever may constitute economic waste, 
it is quite true that all intelligent economy helps make 
possible a higher general standard of living. 



CHAPTER VII 

The Distribtdioii of Wealth 

Distribution, in Economics, is not the commercial 
process of getting goods from factories to consumers; 
but it is the study of incomes : why some have greater, or 
smaller, incomes than others. 

An important division of incomes is between those which 
are derived from the ownership of property and those 
which come from the sale of personal services. Income 
from property may arise out of the ownership of land or 
out of the ownership of capital. The line between land 
and capital is roughly drawn. Land, as stated elsewhere, 
includes everything that may be considered a gift of 
nature, such as soil and minerals, while capital includes 
everything that is both produced and devoted to further 
production. 

A more complete classification of incomes, very com- 
monly employed, is that of rent, wages, interest, and 
profits, corresponding to four classes in society: land- 
owners, wage-earners or laborers, capitalists or investors, 
and business men or enterprisers. These four incomes 
arise from prices paid for the use of land, labor, and capi- 
tal, and for the efforts of business men who succeed in 
combining units of land, labor, and capital into produc- 
tive enterprises. One who understands how the prices of 
goods are determined, as explained in Chapter II, includ- 
ing such matters as the law of supply and demand and 
the law of the normal competitive price, has a key to the 
understanding of how incomes are determined. 

Economists focus attention upon the national dividend, 
sometimes called the national income, which may be said 
to consist of all the commodities and services consumed 
by all the people in a given year. Thfs national dividend 
is not money, but is only measured in money. It is as- 
sumed that the whole of this "dfvidend" goes to the four 



62 BREVITY BOOK ON ECONOMICS 

classes of people mentioned above, who are assumed to 
make up the whole of the community. 

No part of the national dividend, of course, goes to 
anybody who has nothing salable to sell. Only persons 
possessed of either land, or capital, or the capacity to 
render valuable services can enjoy part of the national 
dividend — unless they steal some of it or have some of it 
given to them. 

The prices of land, labor, and capital are decidedly 
interdependent. Changes in the prevailing market price of 
any one of them will occasion changes in the prices of 
both of the others and corresponding changes in the 
incomes of the different economic classes in society. 
The process of adjustment, which always takes time, 
works itself out through the so-called principle of sub- 
stitution, explained in Chapter II. Alert business men, 
observing the technical or mechanical results which they 
can obtain from a dollar's worth of labor, a dollar's 
worth of the use of capital or of the use of land, will 
substitute more or less of the one for more or less of 
the other up to the point at which no further substitution 
of this kind is profitable. 

It is the central idea of this explanation that changes in 
the price of almost anything, whether it be an article of 
consumption or a productive resource, will tend to cause 
changes in the prices of almost everything else. 

If an increase in the supply of labor, occasioned by 
a natural increase of population or by immigration, 
takes place — without corresponding changes in the avail- 
able stock of land and capital — the national dividend 
will increase, though not in proportion to the increase in 
the supply of labor, because of the operation of the law 
of diminishing productivity, or the law of diminishing 
returns, explained in Chapter V. Wages will tend to go 
down relative to rent and interest. If the increase in the 
labor supply results from a business depression, how- 
ever, the available supply of capital may increase as fast 



THE DISTRIBUTION OF WEALTH 63 

as, or even faster than, the available supply of labor; 
and this may cause interest to decrease as fast as, or 
even faster than, wages. This condition is the more pos- 
sible now that the operation of the federal reserve sys- 
tem makes a greater supply of capital available in times 
of business depression. Both the banks and the people 
are now less inclined to draw money from circulation 
when business conditions look to be unfavorable. A 
relative increase in labor, however, would tend to cause 
a relative decrease in wages ; while an increase in the 
supply of land, occasioned perhaps by improvements in 
transportation, or an increase in the supply of capital, re- 
sulting perhaps from an increase in the income of per- 
sons who are both able and willing to save, will tend to 
cause a relative increase in wages. This increase in wages, 
in turn, adds to the potential supply of capital. 

The actual supply of available land, though it has in- 
creased perhaps as rapidly as either population or capital 
during the last century, cannot be expected to increase 
so rapidly in the future, because no new continent remains 
to be opened up. The supply of capital, accumulated 
hitherto mainly by persons of large income, either may 
or may not increase as fast as either population or the 
supply of land. Consequently, it is commonly asserted 
that only a slackening in the rate at which population 
increases can prevent an eventual fall in wages, accom- 
panied by an increase in the rate of rent and the rate 
of interest — unless the progress of discovery and inven- 
tion in technical fields keeps up. 

It is a matter of common observation, both in urban and 
rural communities, that all land sites are not of the same 
desirability. Some farms are more fertile or better lo- 
cated than others, some urban sites better located for 
particular uses than others. It may be difRcult to find 
farms or sites of no, use, but there exists a valuable 
differential between the poorest in use and the better 
grades. Economic rent arises solely from the superiority 



64 BREVITY BOOK ON ECONOMICS 

of the location and of the natural qualities of the soil as 
compared with "no-rent" land, or "marginal land," which, 
by virtue of its location and natural qualities, yields no 
greater return than just enough to pay for the capital 
and labor employed on it. Thus "economic rent" differs 
from "rent." When a farm, for example, is rented for, 
say, ten dollars an acre, part of this price is in reality 
payment for, or the "hire" of, capital goods or "improve- 
ments." 

Whichever users of land within any kind of business 
can use it to best advantage will tend to be the ones who 
succeed in renting it; and those who own land that is 
more suitable or better situated than the worst in use, 
will draw economic rent. 

The existence of economic rent, comprising altogether 
a considerable share of the national income, does not 
depend upon the private ownership of land, but it does 
depend upon the natural scarcity of land, especially land 
of the right kind, rightly situated. David Ricardo stated, 
a century ago, that the prices of goods are not high 
because rent is paid, but rent is paid because the prices 
of goods are high. 

However land be owned, no one has ever seriously 
advocated that the sale of the use of land, according to 
the present competitive method, should be abrogated. 
The prevalent practice, by which the use of preferred sites 
is bought by the highest bidder, is the only insurance that 
the available land will be distributed, among those who 
use it for production, in proportion to the economic 
importance of the uses to which they respectively put it. 
The rate of interest, from the viewpoint of the 
"buyer" of capital, is price paid for the use of capital; 
from the viewpoint of the "seller," it is the price paid 
for "waiting." This price depends upon the relative 
scarcity of capital. Fluctuations in the price of the use 
of capital afford the method by which those who can find 
the best commercial use for it may obtain the preference. 



THE DISTRIBUTION OF WEALTH 65 

When the need for developing an industry puts that in- 
dustry in a position to pay high rates of interest, if neces- 
sary, for the use of capital, the freedom of the market 
which enables it to bid up the rate beyond the low figure 
possible to operators of some other industries, enables it 
to have the preference. Another function of the rate 
of interest, often emphasized, is to cause that amount 
of thrift or saving required to make available the capi- 
tal funds required in industry. Another is to prevent un- 
necessary risks of capital. The use of capital in pro- 
duction is treated in Chapter V. 

The foregoing principles also apply to wages. Laborers 
get wages because an adequate supply of labor, under 
existing conditions of demand for it in industry and trade, 
cannot be had from persons who are willing and able to 
work for fun. The rate of wages for any class of labor, 
from the most unskilled to the most skilled, and the most 
responsible, rises in response to the increasing demands 
of employers who can use much of it to the best commer- 
cial advantage — and prevents the employment of much 
labor by employers who can use it only with less advan- 
tage. 

Profits differ from rent, wages, and interest, because 
they are much more contingent upon the success of the 
enterprise. The enterpriser or business man, who makes 
profits, assumes more responsibility and risk than the 
wage earner, who knows in advance how much he is to 
receive. Similarly the enterpriser differs from the cap- 
italist and the landlord. When an enterpriser renders 
himself services that he might sell on the market, or uses 
land of his own, or capital furnished by himself, his gross 
income will consist only in part of pure profits, the re- 
mainder being wages paid to himself — called wages of 
management — and interest and rent paid to himself, fig- 
ured at the prevailing market rates. If the sum of rent, 
wages, and interest paid to himself as well as to others, 
is not less than the total proceeds for any year's oper- 



66 BREVITY BOOK ON ECONOMICS 

ations, the enterpriser has made no pure profit for the 
year. 

Competitive profits are to be distinguished from 
monopoly profits. Competitive profits accrue from sales 
of products or services made at the current market price 
and require some ability to keep expenses down. 
Monopoly profits are made from some control of the price 
which enables the enterpriser to keep it above the com- 
petitive level. Competitive profits serve as an inducement 
to produce at low cost and are generally considered to be 
socially advantageous. Monopoly profits, however, are 
almost universally frowned upon. State control of rates 
or prices charged by monopolists, explained in Chapter 
III, indicates this social disapproval. 

Competitive business tends to force the less enterprising 
to copy the methods and ideas of the more enterprising. 
This competition, in the end, either lowers the market 
prices of production or raises the expenses of production 
by increasing the demand for materials, equipment, and 
labor, causing their prices to rise. In either case un- 
usually high profits tend to be wiped out. They can be 
retained only by keeping persistently ahead of com- 
petition. But a certain portion of competitive profits is 
in return for ability and willingness on the part of busi- 
ness men to risk their own labor, their own capital, or 
their own land, instead of marketing these things more 
directly. Men who are willing and able to assume an 
amount of responsibility in excess of those who directly 
sell their services or the use of their capital or their land, 
are not so numerous that they can be induced to do their 
work for fun, and, therefore, almost all market prices 
may be expected to be permanently high enough to afford 
compensation for the assumption of this responsibility. 
This minimum of profit, therefore, is not one which the 
operation of competition tends to eliminate altogether. 
But profits will tend to decrease, as time passes, with 



THE DISTRIBUTION OF WEALTH 67 

increases in the amount and sanity of competition which 
tend to decrease the risks. 

It is important to note that one kind of risk or respon- 
sibility assumed by enterprisers is a kind against which 
no insurance can be purchased. A business man can 
insure the lives of trusted employes, take out policies 
against losses by fire, theft, and the like, but after he has 
insured himself to the fullest extent, there remains the 
possibility that some of his calculations with regard to 
the market for his product, or the prices at which he buys 
his materials or his labor, will miscarry and subject him 
to loss. 

Profits are residual. They are what is left, if anything 
be left, when the bills for rent, wages (including wages 
of management) and interest are all paid. They are 
primarily payment for the assumption of business risks. 

Such, essentially, is the economic analysis of rent, 
wages, interest, and profits. The gist of the general 
reasoning upon the subject of distribution amounts to a 
demonstration that the institution of the market, as it 
operates competitively upon the prices of land, of labor, 
and of capital, accomplishes such utilization of these 
factors in all the various lines of production as will serve 
to adjust production to the various demands of consumers. 

Almost all the practical implications of this general 
conclusion bear some relation to public policy. Perhaps 
the most important implication is that monopolistic control 
of the market must, as a rule, be rigidly prevented. 
Special privileges, such as those granted by copyrights 
and patents, must never be permanent, and seldom wide- 
spread. Wherever education or "publicity" of some kind 
is necessary to put potential competitors in possession of 
essential information, then public policy must furnish 
this education and accomplish this publicity. Improve- 
ments in the welfare of any class in society must be 
sought through the kind of education which will qualify 
individuals to earn more, rather than through attempts to 



68 BREVITY BOOK ON ECONOMICS 

exercise much direct control upori any kind of market 
price, including wages, interest, or rent 

Few economists attempt to pass ethical judgment upon 
the righteousness or unrighteousness of the prevailing 
rate of interest or of wages, or upon the beneficence or 
malevolence of the institution of private property in land 
or capital. All such questions require considerations 
which lie so far outside the special field of economics 
that the opinion of other specialists and of laymen, espe- 
cially in a democratic age, must command at least equal 
attention. It might be said, however, that most econ- 
omists are by radicals considered very conservative, and 
are by conservatives considered decidedly radical. 
There seems to be a tendency among economists to share 
in the growth of popular discontent with things as they 
are and to take an active part in measures of social 
reform. Many feel that justice in the field of distribution 
does not now prevail, by reason of the accumulated 
iniquities of history — which iniquities, however, are not 
inherent in the institution of the market. Many feel that 
social and political movements seem to be in the process 
of removing injustice in the distribution of wealth. 



CHAPTER VIII 

Special Problems of Economics 

Many economists give a very large part of their atten- 
tion to the special problems of economics. The books 
and treatises of modern economists are commonly con- 
fined to discussions of single problems, such as the prob- 
lems of labor, of transportation, of foreign trade and the 
tariff, agricultural problems, social problems, taxation; 
also problems of industrial management, such as labor 
turnover, hours of work, welfare activities, and so on. 
More recently, the major problems of finance, of organi- 
zation, of marketing, and of selling are also scientifically 
studied. The laws and principles of this science, as pre- 
sented in preceding pages, underlie the correct solu- 
tion of nearly all these special problems; and the reader 
who desires to acquaint himself more fully with extend- 
ed discussions of many of these problems will be helped 
greatly by first making sure that he has a thorough un- 
derstanding of these essential principles and laws. 

Following are very brief surveys of a few of the more 
important of current economic problems. 

The first great problem to confront economists, and 
one to which they have always given a great deal of their 
attention, is that of public finance, or taxation— which 
is considered by some economists from the point of view 
of the system which causes a share of the national divi- 
dend to flow to all the people as a whole through vari- 
ous governmental channels ; in other words, as part of the 
general economic problem of the distribution of wealth. 

Governments have long supplied the individual citi- 
zen with many things which he formerly supplied for 
himself, such as highways and schools, and many kinds 
of "public institutions"; and in recent years governments 
have greatly extended the variety of services they ren- 
der to individuals— which is the main cause of increased 



70 BREVITY BOOK ON ECONOMICS 

taxation in the United States. To secure adequate rev- 
enue for these increased services and to secure it with 
justice to all citizens, are the leading problems of taxa- 
tion. 

Early students of public finance held that justice in 
taxation was obtained when the individual paid in pro- 
portion to his benefit, as an individual, from public ex- 
penditures ; known as the benefit principle. But the im- 
possibility of measuring some of the benefits to the in- 
dividual, as in the case of the navy, the judicial system, 
experiment stations, and the like, has led to the aban- 
donment of this principle. It is now generally held that 
a tax is most just when it is levied in proportion to the 
individual's ability to pay; known as the ability or faculty 
principle. 

Justice as measured by ability to pay is a paramount 
issue. But some believe that justice is best gained by 
a combination of several taxing principles; and a few 
advocate the abolition of all taxes except a tax on the 
"unearned increment" of land; that is, on the increase 
in the value of land which arises from other causes than 
that of the exertion of the owner of land. This is the 
argument of the "single taxers." 

Taxes are sometimes classified as direct or indirect. 
A direct tax, like the income tax, is paid directly by the 
individual who is taxed; while an indirect tax, like the 
federal excise tax on tobacco, although paid by the manu- 
facturer, is shifted from him by means of a higher price, 
causing the tax to be paid ultimately by the consumer. 
Another classification of taxes is that which divides them 
into progressive, proportional, and regressive taxes. A 
progressive tax, which means an increase in the rate ac- 
cording to the increase in the base— base meaning the 
factor upon which the tax is based, such as income- 
is considered to be more just than a proportional tax. 
which means the same rate regardless of changes in the 
base; because to take the same proportion of a large 



SPECIAL PROBLEMS OF ECONOMICS 71 

as of a small income, for instance, does not involve the 
same amount of sacrifice. Likewise a regressive tax, 
which means a heavier burden on a small base than on a 
large one, is considered unjust. Seldom is a regressive 
tax deliberately levied, although many customs and ex- 
cise taxes are, in effect, regressive, since the richer classes 
do not consume enough more of the taxed commodities, 
such as tobacco, to make the tax proportional. 

The functions of state and local units of government 
are also expanding rapidly. Most American states have 
relied, in the past, mainly upon the general property 
tax, which attempts to assess every item of almost every 
kind of property owned by everybody at a percentage of 
the market value of the property. But many kinds of 
"intangible" property, such as stocks and bonds, are never 
listed. Attempts to patch up the general property tax 
have not met with very great success. Many students 
of the problem advocate doing away with the attempt 
to list every kind of property and developing instead 
various kinds of special taxes, like those on inheritances 
and incomes. 

People in general disagree upon the extent to which 
the state should expand its functions. But almost all 
economists look with favor upon the expansion of public 
functions. Few, however, espouse any plan of taxation 
which would amount to a radical transformation of the 
institution of private property. It must be taken into 
account that taxation may be extended to a point where 
enterprise and accumulation would be discouraged. 

The need for better methods of handling the large 
amounts of funds entrusted to the government to spend 
for the good of all its citizens, is evident. Just as anti- 
quated methods of accounting will no longer meet the 
needs of private business enterprise, so they will not 
now meet the need of. handling public funds. Modern- 
ized and standardized methods ' of accounting, including 
accurate budgets, sinking funds, cost accounting, and so 



72 BREVITY BOOK ON ECONOMICS 

on, are the principle aims of those who are trying to gain 
better results from the use of public funds; and many 
governmental units have now given up guess-work and 
are using modern methods of estimating budgets and of 
distributing expenditures. Many states and cities and 
townships and counties are now making loans and pro- 
viding for their payments as efficiently as this practice 
is carried on in the best of private enterprises. 

Other social problems, often called problems of "social 
reform," are not so strictly economic problems. Yet 
economists have always had something to say about social 
reforms, although they have never assumed to say the 
last word nor even the most important word. Certain 
kinds of social reform, like the movement for segregating 
the feeble-minded and preventing their propagation, do 
not touch this science very closely. But others, like 
socialism, fall very largely within the field of economics. 
The proposals for social reform, with which economists 
are commonly concerned, include anarchism, communism, 
various forms of socialism, and social democracy. 

The distinguishing characteristic of anarchism as a social 
movement is its intolerance of anything like coercion, 
especially coercion that is exercised by governments. An- 
archists would like to abolish any kind of government 
which exercises compulsory authority, as in the collection 
of taxes or in the raising of armies. They would pre- 
fer to see public affairs conducted like the affairs of a 
single large family. There are obvious reasons, of course, 
why such a movement has a very weak following in any 
seasoned democracy like the United States or Great Brit- 
ain. Anarchists have more followers in places where the 
government has been oppressive and autocratic. They 
belong to two schools, which are sometimes called the 
"revolutionary" and the "evolutionary" schools. The evo- 
lutionary school confines its attempts at reform to talk- 
ing and possibly refusing to vote and to pay any taxes ; 
while the revolutionary school believes in the use of vio- 



SPECIAL PROBLEMS OF ECONOMICS 73 

lencc to attain its end. Sober students of economics 
consider the influence of both schools, in a reasoning 
democracy, to be negligible. Anarchism is a philosophy 
of despair. It cannot flourish where living conditions 
are generally good and where the governing classes are 
responsive to the wishes of the governed. 

Communism is a social movement which proposes to 
abolish the right of individual ownership of property and 
to have collective ownership instead— presumably to have 
all property owned by units of people consisting of rela- 
tively small communities. And so, communism could 
abolish the use of money, and consequently break up the 
existing world and national markets into myriads of little 
markets, each one coextensive with something like a neigh- 
borhood. No large-scale industries could thrive under 
such conditions. The number of wants supplied would be 
greatly restricted. The affairs of each small community 
could be administered, it is supposed, by neighborhood 
gatherings, in which general agreement would determine 
just what each person is to do in the community and just 
what he is to get for doing it. 

There is something very sociable about communism. As 
a general movement, however, it is insignificant, espe- 
cially in western nations, although it has had consider- 
able following in parts of Russia. Bolshevism partakes 
somewhat of the nature of communism, explained later 
on. 

Of all the movements of reform, socialism is the one 
of greatest moment. It is of several varieties, the main 
one being that of the school of Karl Marx, which ac- 
cepts the Marxian doctrine of social evolution — looking 
toward the ultimate downfall of the capitalistic class, 
when labor alone is to control all industry. 

Socialism finds its support mainly among wage earn- 
ers, although its leading ideas have been developed by 
thinkers who came originally from other classes in so- 
ciety. Its central aim is, in some democratic way, to in- 



74 BREVITY BOOK ON ECONOMICS 

crease the extent to which the common people control 
governments; and then to use this power of control to 
eliminate — either gradually and with some kind of com- 
pensation, or suddenly and without any nice regard for 
private property — those classes in society which own the 
land and operate industries. Unlike communism, how- 
ever, socialism would not abolish all private property, but 
would confine it to goods used for personal consump- 
tion, such as food and shelter; production being carried 
on entirely through the state. It would substitute state 
enterprise on a vast scale for the present combination 
of private and public enterprise. It is distinguished from 
communism, therefore, both by the scale of its pro- 
posed operations and by the fact that it does not pro- 
pose to do away with the use of money and the method 
by which people sell their services and buy the things 
they want. 

Bolshevism seems to be essentially nothing less than 
an extreme form of socialism somewhat mixed with 
communism. It was born under conditions in Russia 
which would be impossible in any civilized democracy; 
and it preaches some of the ruthlessness and the high- 
handedness that afflicted nearly all Russian parties at 
one time. 

On its political side, Bolshevism utilizes a unit of gov- 
ernment — called the soviet — which ranges in size from 
the smallest neighborhood up to the country as a whole. 
It has exploited the rich and well-to-do by violently insist- 
ing upon the transfer of landed estates from the nobles 
to the peasants. It has decreed equal distribution of wealth 
and income; thus putting a premium on poverty. The 
Bolshevists also have ambitions for the governmental op- 
eration and ownership of railroads, banks, mines., and 
factories. 

Socialism in Anglo-Saxon countries most commonly 
takes the form of social democracy or liberalism. It is 
disposed to make both political and economic changes 



SPECIAL PROBLEMS OF ECONOMICS 75 

in a democratic direction, but to make them gradually 
and experimentally. It is political rather than indus- 
trial in method, and it relies upon popular discussion and 
the ballot rather than upon cruder forms of social pres- 
sure, such as riots and general strikes, although coercive 
methods do have some place in it. 

The socialistic program in countries like England and 
America is likely to be one which takes something from 
various programs advocated by various groups of social 
reformers. Many economists feel that this program will 
include an expansion of public functions, an increase 
in public revenues, the placing of higher taxes upon the 
well-to-do and upon receivers of funded incomes, gen- 
eral acceptance of trade unionism and collective bargain- 
ing, and greater development of all kinds of public edu- 
cation. 

While economists have given considerable attention 
to the foregoing problems of social reform, their chief 
interests lie in the direction of problems that are more 
strictly economic in nature. Labor problems in particu- 
lar have commanded an increasing amount of attention. 
Regarding wages, economists in general seem to be com- 
ing to believe in the determination, either by the state 
or by supervised collective bargaining, of the minimum 
wage below which qualified workers may not be permitted 
to be employed — leaving the market free to move up and 
down in all ranges above the minimum. They commonly 
approve the fixing of the minimum wage by means of 
collective bargaining — where collective bargaining does not 
involve the "closed union" (a union which is closed to all 
except those whom the present members arbitrarily desire 
to let in) which is considered to be monopolistic, and 
therefore should be subject to public control, like any 
other monopoly. 

While economists as a whole look with decided favor 
upon collective bargaining, they also realize that trade 
unions do not include the great mass of the workers. 



76 BREVITY BOOK ON ECONOMICS 

To meet the needs of non-unionized labor especially, leg- 
islation of different kinds remains necessary, including 
laws against child labor, against excessive hours of work 
for women, against the use of dangerous machinery or 
poisonous processes, and the like; also including the de- 
velopment of social insurance, built up by contributions 
from the state as well as by contributions from employ- 
ers and employees, beginning with so-called workmen's 
compensation acts for injuries during employment, and 
proceeding gradually to insurance against old age, sick- 
ness, and even unemployment. 

The principal difficulty in the application of any eco- 
nomic or social reform, as it applies to industry, lies in 
the fact that there is infinite variety in the conditions 
under which industrial operations are carried on ; and it 
becomes impossible, except in the most fundamental re- 
forms, to make their adoption possible under a general 
rule. An attempt to apply universally any scheme of in- 
dustrial or social reform invites the risk of setting up an 
arbitrary or autocratic control that will be destructive of 
progress. Only as reforms are found applicable to indus- 
tries can they be introduced without grave danger. 

Thus economists study nearly all the problems of indus- 
try, especially those problems which affect the welfare of 
the nation as a whole. And invidual economists tend to 
specialize on the study of specific parts of these more 
general problems. For detailed treatments of many of 
the current economic problems, the reader is referred to 
the following list of classified references. 



APPENDIX 

Classified References 

The literature of Economics is so extensive that the 
reader who wishes to extend his study along particular 
lines of the subject may find the following list of classified 
references to be helpful. An effort has been made to 
select readings of standard quality. 

1. General Economics 

TAUSSIG, F. W. Principles of Economics, 2 volumes, 
1911, Macmillan. 

This work covers very completely both the principles 
and the major problems. It is considered by many as the 
leading American work on the subject. 

GIDE, CHARLES. Political Economy, 1914, Heath. 

Professor Gide is a French economist of high rank. 
He writes fluently and interestingly without sacrificing 
accuracy for scholarship. Many business men prefer the 
American translation of this book to similar books by 
American authors. 

CLAY, HENRY. Economics: An Introduction for the 
General Reader, 1916, Macmillan. 
This is an interesting treatment of the whole field of 
Economics by an Englishman who expresses himself so 
that the general reader can readily understand him. The 
American edition of this book, edited by Agger, substitutes 
American illustrations and examples for Clay's English 
ones. 

ELY, RICHARD T. Outlines of Economics, 1916, Mac- 
millan. 

This is a recently revised book which is used widely as 



78 BREVITY BOOK ON ECONOMICS 

a college text on general economics. It includes a very 
complete but brief history of economic thought. 

THOMPSON, CHARLES MANFRED. Elementary 
Economics, 1919, Sanborn. 
This a simple and practical treatment of the principles 
and problems of economics. Written primarily for high- 
school students, it includes exceptionally good exercises 
and review questions, many of which are designed to 
stimulate constructive and independent thought. 

2. Price and Price Changes 

As suggested in many parts of this book, this subject 
is the hub of. economic theory. Its current importance 
has led to the publication, recently, of many pamphlets 
and articles which treat specific parts of the general prob- 
lem. The literature on prices may be divided into the 
fundamental factors of price determination, including 
"quantity" and "anti-quantity-of-money" theories — treated 
in Chapters II and IV of this book; and, on the more 
practical side, into wholesale and retail prices. 

The Bureau of Labor Statistics, Washington, D. C, 
has published a great deal of material on retail prices 
and the cost of living, including much descriptive material 
as well as statistics. In fact, a great deal of what has 
been written on prices during the last decade has been 
based on the statistics gathered by this bureau. 

Bulletin No. 173, published by the Bureau of Labor 
Statistics, is a comprehensive report on index numbers. 

Several New York banks have published, within the last 
year or two, many monographs which contain much good 
material on prices and the cost of living; notably the 
National Bank of Commerce, the Irving National Bank, 
the National City Bank, and the Guaranty Trust Com- 
pany. 

Some of the more general treatments of this and related 
subjects follow: 



CLASSIFIED REFERENCES 79 

LAYTON, WALTER T. Introduction to the Study of 
Prices; with special reference to the history of the 
nineteenth century, 1912, Macmillan. 

SCOTT, WILLIAM B. Money and Banking, 1916, Holt. 
This presents the anti-quantity-of -money theory. 

FISHER, IRVING. Why the Dollar Is Shrinking, 1914, 
Macmillan. 
This "study in the high cost of living" is a thorough 
but somewhat involved discussion of the purchasing power 
of money. It presents the quantity-of -money theory. 

JONES, E. D. Economic Crises, 1900, Macmillan. 

This is a scholarly treatment of this much discussed but 
little -understood subject. 

3. Domestic Trade and Exchange 

WELD, L. D. H. The Marketing of Farm Products, 
1916, Macmillan. 
Many consider this book the leading authority on the 
subject of marketing in all its phases. 

HOLDSWORTH, J. T. Money and Banking, 1917, 
Appleton. 
This book covers money, credit, banking, and prices. 
Its treatment of domestic exchange and of the Federal 
Reserve Banking System is adequate for the needs of 
nearly all business men. 

LEVY, HERMANN. Monopoly and Competition; a study 
in English industrial organization, 1911, Macmillan. 

JENKS, J. W. The Trust Problem, sixth edition, 1912, 
Doubleday, Page. 
Professor Jenks speaks with authority on all the funda- 
mental aspects of the trust question. 



80 BREVITY BOOK ON ECONOMICS 

4. Foreign Trade and Exchange 

SAVAY, NORBERT. Principles of Foreign Trade, 1919, 
Ronald Press. 
This is a scholarly and practical book which covers 
nearly all of the important aspects of the subject. 

VEDDER, G. C. American Methods in Foreign Trade, 
1919, McGraw-Hill. 
This is a book of facts which tells how to get foreign 
trade for many products. It advocates American methods. 

HOUGH, OLNEY. Practical Exporting, 1919, American 
Exporter, New York. 
This book also covers the subject very completely. It 
has met with considerable favor among business men. 

VERRILL, A. HYATT. South and Central American 
Trade, 1919, Dodd, Mead & Co. 

ESCHER, FRANKLIN. Foreign Exchanges Explained; 
a practical treatment for the banker, the business man, 
and the student, 1917, Macmillan. 

TAUSSIG, F. W. Tariff History of the United States, 
1914, Putnam. 
Of the many scholarly books on the tariff, this 
seems to be the one which is referred to most frequently 
as an authority. 

5. The Production of Wealth 

HOB SON, J. A. Evolution of Modern Capitalism; a 
study of machine production, 1917, Scribners. 

HOBSON, J. A. The Science of Wealth, 1911, Henry 
Holt & Co. 
This book is a good treatment of the fundamentals of 
the industrial system. The author is an independent 



CLASSIFIED REFERENCES 81 

thinker who writes clearly and to the point. Several chap- 
ters in this book treat of the distribution of wealth; in 
fact, this book might well be included in section 7 below. 

DRURY, H. B. Scientific Management, 1915, Longmans. 
This is a lucid exposition based on actual practice in 
many plants that are scientifically managed. 

HANEY, L. H. Business Organisation and Combination; 
and analysis of business organization in the United 
States, and a tentative solution of the corporation and 
trust problem, 1914, Macmillan. 

6. The Consumption of Wealth 

The literature on this subject is fragmentary. It is well 
covered in the works on general economics mentioned in 
section 1. Consumers' Leagues in many states have pub- 
lished many special reports, and many of the publications 
of the Russell Sage Foundation fall within this field. Mr. 
Hartley Withers has written a book on "Poverty and 
Waste" which merits attention. 



7. The Distribution of Wealth 

CARVER, T. N. The Distribution of Wealth, 1914, Mac- 
millan. 

This a clear and orthodox treatment of the shares of 
the "national dividend" which go to the various factors in 
production. 

KING, W. I. Wealth and Income of the People of the 
United States, 1915, Macmillan. 
This is the most complete investigation of its kind in 
this country. It emphasizes very important aspects of 
the subject of the distribution of wealth and income. 



83 BREVITY BOOK ON ECONOMICS 

NEARING, SCOTT. Income; an examination of the re- 
turns for services rendered and property owned in 
the United States, 1915, Macmillan. 

8. Taxation 

SELIGMAN, E. R. A. Essays on Taxation, eighth 
edition, 1914, Macmillan. 

LYON, W. H. Principles of Taxation, 1914, Houghton, 
Mifflin. 

9. Social Reform 

RUSSELL, BERTRAND. Proposed Roads to Freedom, 
1919, Henry Holt & Co. 
This book analyzes anarchism, socialism, and syndical- 
ism in a clear and forceful manner. The author presents 
the case for the radicals. 

SPARGO, JOHN. Socialism; a summary and interpre- 
tation of socialist principles, 1912, Macmillan. 

SPARGO, JOHN. Bolshevism, 1919, Harper & Brothers. 
This is a complete, dispassionate, and illuminating treat- 
ment of the subject. It tells clearly and authoritatively 
what Bolshevism stands for, and how and why it devel- 
oped in the light of its true historical setting. 

BROOKS, J. G. Social Unrest, 1903, Macmillan. 

This is a scholarly work by one who sees beneath the 
surface. 

CROSS, IRA B. Essentials of Socialism, 1912, Macmillan. 
Both sides of the question of socialism are summarized 
in Ely's "Outlines of Economics" and in the other books 
on general economics listed in section 1. 

10. Labor 

GROAT, G. G. Introduction to the Study of Organised 
Labor in America, 1916, Macmillan. 



CLASSIFIED REFERENCES 83 

COMMONS, J. R. Principles of Labor Legislation, 1916, 
Harper & Brothers. 
This book is authentic. It includes an interesting chap- 
ter on social insurance. It also includes a well selected 
critical bibliography of works on labor legislation. 

COMMONS, J. R. Labor and Administration, 1913, 
Macmillan. 

COMMONS, J. R. Industrial Goodzvill, 1919, McGraw- 
Hill. 
This is a frank talk to employers regarding their em- 
ployment problems. 

11. Transportation 

RIPLEY, W. Z. Railroad Problems, 1913, Ginn & Co. 

RIPLEY, W. Z. Railroad Rates and Regulation, 1912, 
Longmans. 

RIPLEY, W. Z. Railroad Finance and Organization, 
1915, Longmans. 

JOHNSON AND HUEBNER. Railroad Traffic and 
Rates, 2 volumes, 1918, Appleton. > 

VANDERBLUE, H. B. Railroad Valuation, 1917, Hough- 
ton, Mifflin & Co. 

12. Immigration 

FAIRCHILD, H. P. Immigration; a world movement 
and its American significance, 1913, Macmillan. 
Many feel that this is the best of the numerous books 
on this subject. It avoids details and gives little space 
to the controversial aspects of the subject. 



84 BREVITY BOOK ON ECONOMICS 

13. Finance 

LOUGH, W. G. Business Finance; a study of financial 
management in private business concerns, 1917, Ronald 
Press. 

GERSTENBERG, C. W. Materials of Corporation 
Finance, 1915, Prentice Hall. 

LYON, W. H. Capitalisation; a handbook of corporation 
finance, 1912, Houghton, Mifflin & Co. 

14. Agriculture 

CARVER, T. N. Selected Readings in Agricultural Eco- 
nomics, 1916, Ginn & Co. 

NOURSE, E. G. Agricultural Economics, 1917, University 
of Chicago Press. 

15. Statistical Method 

SECRIST, HORACE. An Introduction to Statistical 
Method, 1917, Macmillan. 

COPELAND, M. T. Business Statistics, 1917, Harvard 
University Press. 



INDEX 



Anarchism, 73. 
Anti-trust laws, 20. 
Arbitrating, 18. 
Balance of trade, 38, 41. 
Banking, 35-38. 
Bimetallism, 30. 
Bolshevism, 74. 
Capital, in production, 43; 

and consumption, 57; in 

distribution, 64. 
Clearing houses, 32. 
Comparative Costs, law, 24. 
Communism, 73. 
Competition, 1, 3, 7, 20. 
Consumption of wealth, 55. 
Co-operation, business, 20 ; 

of labor and capital, 47; 

consumers', 58. 
Cost of living, 56. 
Costs, money and real, 46. 
Credit, instruments, 31 ; 

personal, 31; bank, 37. 
Crisis, 15. 
Diminishing returns, and 

productivity, 52. 
Diminishing utility, law, 6; 

applied in consumption, 

55. 
Distribution of wealth, 61. 
Division of labor, 45. 
Economics, defined, 1. 
Economic thought, histori- 
cal, 2. 
Elasticity of demand, 10. 
Exchange, domestic, 29-38; 

foreign, 38-42. 
Federal land banks, 36. 
Federal reserve system, 35. 
Fiat money, 30. 
Foreign exchange, 38. 
Free trade, 25-27. 
General price level, 12, 33. 
Government ownership, 22. 
Government regulation, 21. 
Gresham's Law, 30. 
Index numbers, 12. 
Industrial Revolution, 46. 
Inelastic demand, 10. 
Interest, 34; in distribution 

of wealth, 64. 



Labor, defined, 43; prob- 
lems of, 75. 

Large-scale production, 48. 

Luxuries, 56. 

Management, defined, 49 ; 
scientific, 49-51. 

Marginal utility, 7. 

Market, defined, 7 ; price, 8 ; 
money market, 35. 

Money, 29-31. 

Monopoly, defined, 9; regu- 
lation of, 21, 22 ; price, 10. 

National dividend, 61. 

Necessities, 56. 

Organization, industrial, 49. 

Price, market, 7; competi- 
tive law of, 9; monopoly, 
10; relations, 11; level, 
12, 33. 

Production, analyzed, 43 ; 
stages of, 45. 

Profits, 65, 66. 

Protection, 25, 

Public finance, 70. 

Purchasing power of dol- 
lar, 14, 15, 33. 

Quantity-of-money theory, 
12-14, 33. 

Rent, 63. 

Single tax, 70. 

Social Democracy, 74. 

Socialism, 73. 

Specialization, 48. 

Speculation, 17. 

Standard of deferred pay- 
ments, 14, 15. 

Standardization, 48. 

Substitution, principle, 11 ; 
factor in distribution, 62. 

Supply and demand, 7, 8, 11. 

Tariff, 25, 26. 

Taxation, 70-72. 

Trade, domestic, 19 - 23 ; 
foreign, 24-28. 

Unionism, 75. 

Utility, defined, 6; classi- 
fied, 43. 

Value, and price, 6. 

Wages, 65, 75. 



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